Will Geopolitical Progress Mean Lower Oil Prices? After a decade of elevated oil prices due to lost production in Iraq, Venezuela, Nigeria, Libya and Iran, the past few months have seen a fairly moderate response to the advances of ISIS in Iraq, the Israeli-Hamas fighting, and the rebellion in eastern Ukraine. Prices rose as much as $10 at the worst point, and have largely declined since then, with WTI under $100 a barrel and Brent threatening to break that level. Of course, the US bombing of an ISIS position (for which information is scant) and expectations of further involvement saw an upward blip in oil prices: explosives in an oil producing region usually have that effect on traders, even if they aren’t near any actual production facilities. Longer-term, expect the effectiveness of ISIS to erode if the US carries out more active strikes, since their ability to zoom from place to place without being observed has allowed them to concentrate forces and overwhelm opponents. If the US uses drones to attack ISIS columns, or even to provide Baghdad and/or Erbil with information, ISIS’s progress is likely to be stalled. Even better, the growing possibility that Maliki will accept a pension (gold or lead) could mean a unity government in Baghdad which would turn less militant Sunni’s against their current allies in ISIS, plus probably lead to some resolution of the Kurdish oil export constraints. ISIS might remain a factor in parts of the northwest (and Syria), but the threat will be perceived to have peaked, and oil prices should slump as a result. Possibly they will seek an apocalyptic exit, blowing up the Mosul dam for instance. General von Cholitz is thought to have refused Hitler’s command to demolish Paris on retreating in World War II, but ISIS seems to be at the least as bloodthirsty as the Nazis and might do something similar. The damage as far south as the oil fields could be significant, but that remains a relatively small probability. (I’m not buying real estate in central Iraq any time soon, though.) The winding down of Israel’s incursion into Gaza is a minor factor, since it was never perceived as having any effect on oil supply. The lack of sympathy for Hamas among most oil producers was the most important factor (recall that Saddam Hussein had claimed to shut down production for a month during the second intifadah but without impact). Reports that Putin is considering pushing a compromise on the Ukrainian separatists are also good news, as this has been a major uncertainty in global markets, as the possibility of escalation was creating just the sort of uncertainty that would weaken already anemic economies in Europe. Removal of this threat would be good for equities markets (short-term) and Europe’s economies (longer-term) which would actually be bullish for oil demand and, theoretically, prices but initially at least the potential for less violence could depress oil prices slightly. Where we’ll be next week is certainly uncertain, but the signs suggest oil prices might be in for another dip. #Oil
Posted on: Fri, 08 Aug 2014 18:27:08 +0000