The message from oil analysts and capital market participants is mixed. On one side, the picture is bleak, as unemployment and economic contraction loom, while so-called oil “fundamentals” are weak (weak demand and strong supply). These all suggest that the oil rally may have run its course for the time being. However, the bullish camp points to the now rhetorical “green shoots of recovery” theory, reports of stockpiling by China, short (seller) covering in futures markets,  and higher risk appetite among investors and traders — with all the aforementioned accompanied by a weakening dollar, which has an inverse relationship with oil and many other commodities.

Therefore, it truly is a mixed bag. For consumers and domestic U.S. manufacturers, an economic recovery at home and more broadly around the world has huge implications, but higher oil nibbles away at the purse and at margins, respectively. At the same time, as a weak dollar typically suggests a more favorable climate for U.S. exports, there is pressure on the input (or materials) side from rising commodities. Nevertheless, at current price levels, higher growth for higher oil is a bargain! For oil producers, higher oil is almost always welcome, although refining operations can cap the upside. Also, higher oil means more likelihood for investment and exploration, which eventually may lead to more revenues, and supply, but ultimately, perhaps somewhat of a damper on prices.

That being said, TradeFlow21 remains enthusiastic about the sustained growth prospects in the Middle East. In some cases, oil now accounts for a lower portion of GDP than in years past as Gulf economies seek economic diversification, but in terms of a source of foreign reserves, oil overwhelmingly remains the source of liquidity. In our opinion, the higher oil prices of late are not necessarily worrisome from the U.S. viewpoint. Reason being is that OPEC, and the Gulf producers in general, are sensitive. A recent guest on Bloomberg Radio made the point that the Gulf producers don’t want to be blamed for a prolonged global recession, and therefore, are willing to sacrifice near-term profits and even some budgetary shortfalls. Oil producing companies have a relatively low break-even price, perhaps as low as $30 or less, but oil producing nations that went on a spending spree in recent years tend to have budgets based on break-even oil in the $40-$60 range, with outliers such as Abu Dhabi in the low $30s and Bahrain in the $70s (Fitch Ratings). No doubt sovereign budgets have been, and will be further adjusted, but in order to sustain growth, significant amounts of money will continue to be spent within the region. For Connecticut manufacturers and exporters, the Gulf represents real opportunity (from everyday consumer products to building materials and beyond), and TradeFlow21 is here to help make the region more accessible to you.

Next January, President-Elect Barack Obama will be severely tested on many fronts:  a two-theater war; dislocation of global markets; and a mounting environmental crisis that threatens to alter the face of the earth and the security of nations. He will be pressed for answers, not just explanations.

For many, the Middle East is the nexus of terror, provoking wars of intervention, and oil, which has created untold wealth for the region and pollution as a by-product of a fuel-addicted world. It is also a land of over 300 million people, where industry, entrepreneurship, and direct foreign investment have fed a development boom of unprecedented scale. Though Gulf states in particular have felt the effects of the current financial crisis, resulting in plummeting home prices in Dubai and the court-ordered closure of the Kuwait stock exchange, the Middle East’s influence in world markets is uncontested.

We urge the President-Elect to seize the moment and let trade flow freely into this intersection of the world, supplanting terror and war by transforming oil-dependent economies into highly diverse, fully integrated drivers of global growth and opportunity.

Let trade also rebalance a troubled region that for the past 60 years has employed a Cold War model with Israel as the sole arbiter of U.S. and Western interests.

Let trade transcend language, culture, and faith as democracies and theocracies find concord through commerce, with prosperity and security the dividends.