In this article I decided to take a rather non-conventional approach to oil trading and to analyse the geopolitical aspect of the oil market and its implication for oil traders.
Oil has traditionally been at the center of international relations.
The control of the oil fields has been – and still is – a chess game. Since two centuries nations have been fighting over this resource. First it was Britain who fought the Ottomans in World War I. Later it was the United States, which sought to impose several coups to control the oil in the Middle East. After the end of World War II, the United States sought to control the ‘Grand Area’ by which it would exert its political and economic dominance on nations to feed its ever growing consumer society. Lot of wars have been fought as a result: Iraq, Syria, Lebanon, Egypt, and Libya…
What is the situation now? Why a huge surge in oil prices related to geopolitical events is possible and how could it happen?
- (1) Current geopolitical issues
- (2) Their possible implications on oil prices
(1) Current geopolitical issues
- Middle East in general
The Middle East is a political time bomb and has always been for the past 50 years. Iraq, Iran, Syria, Afghanistan, Yemen… Many countries are unstable or, at least, unpredictable.
- Iran / US tensions
Little reminder: in 2016 the U.S. and many other nations signed a comprehensive nuclear non-proliferation agreement with Iran. This agreement was one of the last diplomatic initiatives of the Obama administration.
Since, President Trump took put the Iran agreement at risk, stating it was a bad deal for the United States. Early into his administration, the rhetoric between the U.S. and Iranians has been increasing. The U.S. has put the theocracy on warning and Iran has responded with test firing missiles and military exercises.
There could be an escalation between the US and Iran leading to a new embargo. This could mean Iranian oil production would face difficulties to be sold on the international market. Keep in mind that Iran produces around 4 m b/d, take this quickly out of the market and you got a big deficit in production.
With the election of Donald Trump and the initiation of his anti-Iranian, anti-Muslim security counsel, the Iranian target that has long been on the list comes closer to being taken out. This is of prime importance for oil investors because the Strait of Hormuz is located in Iran. This is of prime importance for oil investors because the Strait of Hormuz is located in Iran. According to the EIA, the Strait of Hormuz shuttles some 25-30% of the world’s oil and may be threatened should the the outbreak of war occur.
- Saudi-Arabia /Iran tensions
The recent OPEC deal was struck allowing Iran to continue to produce while other member nations took up the slack in the interest of a higher oil prices. This would not have happen in the past, when Saudi were not agreeing to any output cuts unless all members participated. Yet animosity between Iran and Saudi Arabia has not gone away and each party is distrustful of the other.
There is a proxy war in Yemen that keep going between Saudi Arabia and Iran. Any increase in military operations in Yemen that borders with Saudi Arabia could cause an Iranian inspired and funded attack on Saudi production, refining and pipelines within the Kingdom.
There are many nations across the Middle East that fear of the rise of Iranian power and influence in the region. The Iranian theocracy spent decades with sanctions hanging over their heads therefore, the loss of revenue from their 4 million barrels of production per day will cause fewer problems for them than subversive action will hurt their neighbors in Saudi Arabia and the other Gulf States who are U.S. allies.
Above: map of pipeline installations in the Middle East
Iran’s strategic geographic position in the Persian Gulf could threaten critical logistical routes for the energy commodity that would impact world supplies and availability. Iran could potentially disrupt the locations that transport oil throughout the energy rich region.
- Russia / Europe tensions
One issue that people tend to overlook: the Russian growing nationalism and expansionism.
Last but not least, I think Trump could be categorized as a “Geopolitical issue”.
You can’t predict his action but you can be sure of one thing: it would results in a surge in oil price.
Trump and his government / personal connections are strongly enticed to push oil prices higher. Ten years ago Bush connections to the oil industry played a major role in the US Middle East policy. The face is different but the underlying interests are the same – the oil industry has strong leverage in the US government and will do what it could to use them for its own agenda.
(2) Their possible implications on oil prices
- Quick history of past geopolitical events and their results on oil prices
We have not seen a dramatic upside spike in the price of crude oil in many years.
The last time the price doubled in a matter of minutes was in 1990 when Saddam Hussein marched into Kuwait shocking the oil market causing the price to double from $20 to $40 per barrel in a matter of hours.
- What could happen in 2017?
There is a rising chance for a significant spike in the price of oil that results from increasing political tension in the Middle East region. The diplomatic solution to Iranian petulance in the region has changed dramatically under the new U.S. administration which is likely to take military action first and ask questions and negotiate later.
- I believe a price spike could take crude oil futures back to the $80 level on a short-term basis.
- However, like in 1990, any dramatic price spike from hostile action is likely to be short-lived – be prepared to take profits quickly