The folks at Religare Capital Markets have put together one of the better cheat sheets on a region that most of the big banks largely ignore: the Middle East, where day after day we get new and more troubling headlines of escalation, usually involving Iran and Israel. And since at the end of the day, in a resource-strapped world, the bottom line is always about energy, and oil, what happens in the MENA region is arguably far more important at the end of the day than who prints how much electronic paper/linen. But most important is probably the following analysis charting the probability of an attack of Iran by either Israel or the US. We were quite surprised to find that in Religare's opinion the probability of an Israeli-sourced attack on Iran hits a high of 50% sometime in early February, with the US contributing about 20% with a peak in May and just before the presidential elections. This is how they explain it: "The probability of an attack on Iran is now higher than ever. The only solution to the current crisis, diplomacy, is off the table due to politics and the focus is now shifting to regime change. We see the probability dropping mid-year, although US elections could increase the probability of a US attack significantly (unless Ron Paul steams ahead), as will Iran’s likely decision to move their centrifuges to reinforced facilities in Qom if not handled correctly (likely mid-year). We reiterate our view that the fallout may not be as bad as expected from an Israeli strike, horrendous from a US one." And if they are right, what happens to oil will likely be the biggest catalyst of events in 2012 - a topic PIMCO has already had some extended observations on.

Other big picture geopolitical observations on MENA:

The regional Cold War The deployment of the Peninsula Shield Force to quash the uprising in Bahrain was the first act of a rapidly developing regional Cold War and was the first market of what was to be an increasingly independent and assertive foreign and security policy from the GCC and Iran. We do not see this as an ideological conflict, although old prejudices die hard, but rather a political one between countries that have gone from being heavily indebted to rapid growth in just over a decade and are now looking to project their control in their region. Local populations have also been a significant factor in this and we have seen increased budgets and reinforcement of traditional social contracts to provide the groundwork for foreign policy, as well as a focus on muting any internal security threats. Finally, the fall of OPEC and rise of the GCC as the owners of spare capacity has been an important one for the oil market, the results of which we are likely to see come through later this year when the oil price comes under pressure. Israel’s increasingly fragile military hegemony and new arms race Israel’s position as the regional military hegemon will come under increasing pressure in the coming years as tens of billions of dollars of weapons enter the region to challenge the ascendancy of Iran. Should Iran reach nuclear capability, most GCC states will also build their nuclear arsenals even while pursuing independent foreign policies that actively speak out against actions they disapprove of. Rise of neo-Islamism and adjustment of jihadism The Islamist groups that were demoted to social functions under a number of thee deposed regimes have now come to the fore in democratic elections and the rise of a more pluralistic neo-Islamism once they find their feet could have significant implications globally. Jihadist groups have become increasingly decentralized and used for political ends, with African jihadist groups a particular concern with many regions fertile for recruitment Oil through the roof Nobody really believed that we were approaching the point of maximum oil production in 2008, but they do now. The shifting structure of the oil market and increased interference means that prices are now predicted to be above $110 for the foreseeable future, representing a huge wealth transfer into this region. This is not sustainable, but should last 3-4 years at least.

Full report: