Share markets are already reacting in anticipation. The New York Stock Exchange's performance in the first quarter was the worst since the aftermath of Hurricane Katrina in the autumn of 2005. The Shanghai and Shenzhen share markets have recovered from dramatic losses. But the consensus is that a Chinese equity slump is possible in 2007. With few exceptions, most emerging market stocks look fully priced. Practically everywhere, the next equity move is likely to be down.

This conclusion supports forecasts that the Gulf share slump will continue. Speaking at a seminar in Dubai on 1 April, Julius Baer's head of research Venkatraman Anantha-Nageswaran suggested only a fool would invest in the Dubai Financial Market where the index fell to under 3,700 at the end of the first quarter. He said the decline could continue until the index hits 2,500, a further fall of more than 30 per cent. A similar trend was projected for the four other big GCC markets: Abu Dhabi, Kuwait, Qatar and the UAE.

If that happens, it will test the conviction that the GCC equity meltdown since February 2006 will not affect the broader non-oil economy. Full-year results for most GCC commercial banks indicate the financial sector suffered, but not seriously. There may be, however, some deferred shocks. The vulnerable spot in 2007 is the connection between GCC equity and property markets. The fear is that distressed equity investors will liquidate real estate to repay the banks and spark a downward Gulf asset price spiral.

The good news is in the oil market. The face-off with Iran about violence in Iraq, Tehran's support for groups charged with terror and the Islamic Republic's nuclear programme has added at least $10 to the crude price. Brent blend will probably average $60-70 a barrel in 2007. The region's balance of payments surplus will not be much lower than last year.

But even if Gulf tensions ease sufficiently to eliminate the war-fear premium, a fresh factor is kicking in that will keep oil priced in excess of $50 for the foreseeable future. As MEED has reported, soaring costs and a shortage of skills is forcing a slowdown in Gulf oil industry investment. The hope that new capacity would end the possibility of $100 a barrel oil will be sorely tested in the next five years.

Politics is never far beneath the surface of world oil. Two years ago this month, Saudi Arabia's King Abdullah visited President Bush in Crawford, Texas, where he announced a plan to lift the kingdom's oil production capacity by 3 million barrels a day. It was one of the first fruits of a more conciliatory US Middle East policy brought about by deteriorating conditions in Iraq and disillusionment among American voters.

King Abdullah's dramatic denunciation of what he called the 'illegitimate foreign occupation' of Iraq at the opening session of the Arab summit in Riyadh last month has brought the story full circle. Saudi Arabia is disappointed with America's refusal to respond to the new Palestinian government that emerged with Saudi mediation in Mecca in February. The summit speech helped reposition Riyadh in the eyes of the Arab and Islamic world and delivered a shot across Washington's bows. The spirit of Crawford is not yet dead, but it is sickening.

This came less than a month after King Abdullah met Iran's President Ahmadinejad. With the US floundering, Saudi Arabia is using its influence and wealth in a more concerted manner than the region has seen for a quarter century.

The oil price is another way for the kingdom to make its point. It would be wrong to suggest Saudi Arabia