David Fuller's view Every subscriber who has been with us for more than a few days will presumably recall that for much of last year Fullermoney repeatedly described commodities as an opportunity which would also become the next problem for the global economy.

That problem arrived first in the form of soaring prices for most agricultural commodities, as you can see from this weekly chart of the Dow Jones UBS Softs Index. This surge commenced in June 2010 when Russia's drought and heat wave caused the first in a worldwide series of poor crop returns, at a time when global demand was also increasing. We have all heard about food price inflation in recent months but industrial soft commodities such as cotton and rubber also accelerated higher. These trends were fuelled by supply shortages and increasing speculation.

This week, events in the Middle East have caused the price of crude oil, particularly the Brent contract, to surge.

Fullermoney also described an eventual spike in the price of crude oil (NYME & Brent) as the greatest threat to the global economy. While the price of crude oil had been ranging gradually higher for some time, the spike came sooner than we would have normally expected or hoped - "Events, dear boy, events", as Harold Macmillan famously said. A not insignificant factor behind recent events in the Middle East has been food price inflation.

The oil spike is a moderate economic threat, so far, priced in a soft USD and at a time when global usage is more efficient than ever before. However we have yet to see any evidence that the price increase is over. It has been more extreme in Europe where most Libyan oil is delivered. As in 2008, the move above $100 a barrel by NYME crude is caused mainly by speculation, but the current concern over supplies from the Middle East is understandable. An uncertain political outcome in that region and the sharp rise in crude prices over the last few days are a recipe for extreme forecasts, based more on people's fears rather than insightful analysis.

Here are some possible scenarios:

1. Best case - Qaddafi and his sons soon flee Libya or are removed from power by other means, and a tribal power sharing arrangement reduces the risk of further civil war. There are other potential dominos among oil exporters, not least Algeria, but a resumption of normal oil flows from Libya would calm markets. Crucially, the risk of serious unrest in Saudi Arabia remains small. The less privileged Shiite minority is between only 10 to 15 percent of the total population, according to Wikipedia. King Abdullah is popular among regional leaders and has just announced a massive "$36 billion worth of new jobless benefits, education and housing subsidies, and debt write-offs", mentionen in today's report from Bloomberg. Saudi Arabia has also pledged to replace any lost Libyan output. Under this best case scenario oil prices peak close to current levels and fall back sharply.


2. Worst case - Libya and Algeria remain embroiled in lengthy civil wars, all but stopping their oil exports for a sustained period. Regional unrest increases and Iran becomes considerably more active in developing militant alliances with Shiite populations. The price of crude oil spikes sharply higher from current levels. Elderly King Abdullah becomes a waning influence in Saudi Arabia, creating greater uncertainty. Global stock markets slump on justifiable concern over rapidly deteriorating economic prospects and a worsening outlook for corporate profits.

3. In-between case - The key factor here is that the oil price, while not spiking to extreme levels, would remain higher for longer than the global economy could successfully handle. Consequently global GDP growth would slow, with a number of western countries suffering stagflation or recession.

Subscribers may have their own variations on these three scenarios and are probably as qualified as anyone to make educated guesses about the outcome. The key is to think analytically, rather than emotionally. Everyone thinks they are responding analytically to a crisis but few actually do. We need look no further back than 2008-2009 for ample evidence of this.

I do not know which of the three approximate scenarios will prevail, but I suspect the odds are in favour of either 1 or a combination of 1&2 above. With an uncertain outcome and daily developments to monitor, markets are likely to remain volatile and sensitive to sudden changes in the news - good or bad. Right now, the key barometers of sentiment are crude oil, gold and the S&P 500 Index.

This item continues tomorrow, with a closer look at asset classes.