How did the death of Osama bin Laden impact upon the oil markets?

How are we set up for the burst of the commodities bubble?

And what might happen if a figurehead more directly linked to industry was removed in a similar manner?

Perhaps more stirring than the dubious mock-ups of photographic evidence from the U.S. Navy SEAL’s successful assassination of al-Qaeda founder and protagonist, Osama bin Laden, are the videos—some say home movies—that have found their way into the international media. Huddled in what looks like a threadbare tan blanket, sporting a hat and bedraggled greying beard, a 54-year-old man clutches a television remote as he watches a bleary, flickering screen, mounted precariously on top of a writing desk.

This is the face of international terrorism stripped bare of the henchmen that flanked him and the fear he instilled in millions of people. It wouldn’t be long before he died by ballistic trauma, leaving the world reeling and questioning if it could possibly be true that he is gone. The notion that this single seemingly fragile man’s demise could ricochet so heavily across our international commodities markets seems like quite a feat, at least in terms of scale, but since U.S. President Barack Obama officially announced bin Laden’s death on the evening of April 29, it appears that his departure has been felt the world over in jubilation, trepidation and quiet contemplation.

As the month has ensued, so have reports factoring in the role of commodities in his story—particularly oil. And while it is uncertain quite how much of an effect his death has had on our markets, it is clearly a part of the activity we all saw following Obama’s address.

Of course, while the war on terror’s successful mission dominated headlines, the world did not stand still. Analysts now question whether bin Laden’s death has had such a profound impact on pricing as news engines first reported on May 2. Gains in the U.S. dollar and oil inventories, in addition to mounting worries concerning the eurozone and typical market volatility, seem like altogether more plausible factors for the flash market rupture, albeit not quite as compelling a story for the front page. Following years of headlines on terrorism and commodity markets reflection, not least the more directly related stories such as pipeline attacks carried out by the Movement for the Emancipation of the Niger Delta (MEND), and the recent defection of Shokri Ghanem, chairman of Libya’s National Oil Corporation, have we learned to be a little more discerning in attributing such events to market dynamics? And what, essentially, is the true longer term linkage between terrorism, terrorism reporting and the oil markets in the wake of the death of bin Laden?

Cross-affecting oil news after death

However the news of bin Laden’s death reached you, it is safe to say that it came as somewhat of a surprise. Officials in Pakistan, the U.K., the wider U.S. governmental structure and the rest of the world knew nothing of this raid under darkness until the big announcement took place. Without meaning to draw too much from investor appetites as a result of war psychology or media agenda-setting, news leading up to bin Laden’s death had been by no means positive—particularly in terms of political frictions sparking eruptions of violence around some states in the MENA. The situation in Libya, where neither the rebel forces or Colonel Muammar Gaddafi and those loyal to him appear currently capable of resuming proper oilfield operations and export, has been a large concern.

Reports have stated that Gaddafi forces sabotaged pipelines and operations to prevent rebel oil production, and thousands of barrels per day have been knocked off production volumes, depriving rebels from generating any income from oil and troubling global markets.

As of late April for example, prior to the death of bin Laden, it was reported that the quarterly hydrocarbon production of French oil major, Total SA, had fallen to 2.371 million barrels of oil equivalent per day—from 2.427 million for the year previous—largely due to the production halts caused by unrest in Libya (aside, Total has posted predictions of a stable full yearly production rate).

Fears about political stability and security in the region, along with some other MENA states, and the world crawling out from underneath the effects of the global financial crisis, were pointed to as large oil companies posted strong profits off the back of higher commodities prices. On the Monday following the announcement on bin Laden’s death, markets saw initial market volatility—widely attributed to fears of reprisal attacks following the U.S. kill mission and the dollar’s strength. That morning oil fell below $111 per barrel, and then rose back to $114.83 at midday before dwindling again to finish slightly lower for the day.  West Texas Intermediate Crude (WTI) futures dropped to $112.89 a barrel. Commentators pointed to al-Qaeda’s rap sheet when it comes to targeted terrorist attacks on oil operations and bin Laden’s past requests for such violence to be carried out in order to thwart Western supply. On this, it appeared that at least in the short-term, with the shot-caller gone, threats of such attacks had dissipated and both Brent and WTI crude futures looked set towards lower prices.

On May 6, the end of the week of bin Laden’s death, it was reported that crude oil caught the biggest weekly decline it has seen, falling 15 per cent from $113.93 a barrel on April 29 (when Obama’s announcement was made in the evening). This was attributed to bin Laden’s passing and the strengthening dollar.

In reining this trend back into our current news climate, however, it is possible in hindsight to weigh up how the void left in his absence is being filled, both in terms of his role as al-Qaeda’s figurehead and in perceived priority threats to markets. Latest reports state that data obtained by the Department of Homeland Security, from his Abbottabad compound, shows bin Laden intended to hijack and blow up oil tankers to further disrupt Western supply, and now al-Qaeda’s rumoured acting head, Saif al-Adel, is in place and bin Laden’s other potential successor and second in command, Ayman al-Zawahri, has vowed to avenge the former-leader’s death. Most recently, a 49 minute recording from al-Zawahri says that Libyans ought to take up arms and fight the Western coalition because it is after their nation’s oil. Most chillingly, in a posthumous message released by al-Qaeda on May 19, bin Laden praises those behind civil unrest in the Middle

East, and urges them to continue with uprisings in what he calls “winds of change” that will spread across the Muslim world.

In brief, it appears that when bin Laden’s death was announced, political frictions in the Middle East had caused oil prices to gain. His demise contributed to some initial volatility and price reductions, but the constant stream of new reports relating to al-Qaeda, the situation in Libya and beyond continue to drive prices on, suggesting his death has proved to be, in itself, to relatively short-term market effect.

Other factors in play

In addition to ongoing events in the Middle East, the U.S. dollar has undoubtedly been a big part of May’s oil highs and lows. In the week beginning May 2, Brent crude dropped 13 per cent and copper fell by five per cent, causing financial minds everywhere to ponder on whether the commodities bubble had finally burst. Those who chose not to buy into bin Laden’s death as the driver behind the price drop pointed out that following a year-long low of 72.933 on April 29, the dollar index (which is compared against the euro, Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona) was changeable. As the dollar rose, commodities became more costly across currencies, and despite a year (from June 2010) which has seen an 18 per cent plummet, the index gained by just shy of three per cent that week. That same week, on May 4, the U.S. Energy Information Administration revealed data showing that the nation’s crude inventory stood at the top end of the average for this time of the financial year, ending at 336.5 million barrels for the week to April 29.

Simultaneously, things took a turn for the worse for the euro, which tumbled to its lowest ebb against the dollar for a four month run, partly spurred on by perceptions that the economy of Greece is slipping into chaos.

The quandary at this juncture, it seems, came from conflicting market perceptions and comments from traders, analysts, and the mainstream news agencies’ correlation of bin Laden’s death with market movement.

Speaking to Bloomberg, Andrew Ross, a partner and global equity trader at First New York Securities LLC, said that, “the killing of Osama bin Laden is not a material event for the stock market,” and that, “the market impact should prove limited.”

Gerard Rigby, an analyst with Fuel First Consulting in Sydney, told Business Today that, “The sentiment is that now that he’s dead, al-Qaeda will lose a bit of its impact and some of that terror premium will come out of pricing. There’s also some profit-taking going on as we wait to see what the impact of this news is.”
Addressing concerns over the commodity bubble directly on May 6, Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York, told Bloomberg that there has been “a big commodity bull run and at some point something will happen to burst the bubble. When Osama bin Laden was killed, the market sold off quickly and maybe tipped its hand as to what it could do on the downside, and that spooked a lot of longs.”

Jim O’Neil, chairman of Asset Management at Goldman Sachs London, spoke similarly to the news agency. “The immediate consequences are, as we are seeing, a positive re-pricing of the U.S and its markets, and a slight de-rating of commodities,” he said on May 2.

“Beyond this immediate reaction, markets need to be careful as bin Laden has possibly not been the single biggest security threat directly for many years, and those who will regard him as a martyr won’t give up as a result of his killing.”

A psychological boost?

It has long been established that fears of terroristic activity present risky options when considering investment anywhere in the world, and depending on how strong an individual feels al-Qaeda is after this blow, and subsequent reports about their lack of capital, it is possible that some of this sort of risk (in their instance) has been mitigated—but how long for is anyone’s guess.

When Obama announced this pivotal news, oil prices on the Singapore New York Mercantile Exchange (NYMEX) fell almost immediately by $1.23 to $112.70 in what looks to be a result of psychological impact (on the other side of the globe). No supply-demand shift or pricing changes were cited; no concrete economic reasons behind the movement.

Given the total lack of direct association between bin Laden and oil, save his ideas about disrupting operations, it has been widely accepted as a display of emotion, short-lived once market demand and the possibility of reprisal are factored in, and nothing more. However, this does not mean that the reaction on the markets to his death is a non-event. It has caused more people to consider what might be, should a ruler such as Gaddafi, or another head of a key oil country, be killed or removed from a position of any control.