Crude Oil and Geopolitics

Crude Oil and Geopolitics explained by professional Forex trading experts the “ForexSQ” FX trading team. 

Crude Oil and Geopolitics

When it comes to commodity or raw material markets, oil is one of the most political staple commodities that trade. This is because demand for crude oil is ubiquitous while supplies are concentrated in some of the most turbulent political regions in the world. Over half of the world’s oil supplies are in the Middle East.

OPEC, the Organization of the Petroleum Exporting Countries, has a huge share of world crude oil reserves.

OPEC is a cartel, which is an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition. At the end of 2014, OPEC reported reserves of 1.206 trillion barrels of oil, which is 81% of total world reserves. Of those reserves, Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates, Qatar and Libya have 67.6% within their borders. Between the period of June 2014 and July 2015, crude oil was in a bear market — the price of the energy commodity moved from over $100 per barrel to under $50 based on the active month NYMEX oil futures contract. OPEC’s mission is to “…ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to customers, a steady income to producers and a fair return on capital to those investing in the petroleum industry.”

As crude oil prices have moved lower, the oil cartel did not cut production even though it is in the cartel’s interest to maintain prices at a high level.

Instead, the cartel has let the price fall in order to allow higher cost production to become uneconomic. OPEC maintained their production ceiling at 30 million barrels per day. However, as prices moved lower many members of the cartel suffered economic hardship as they received less revenue for their oil production.

Many have attempted to sell more oil to make up for the financial shortfall. In July 2015, OPEC was producing and selling around 32 million barrels of crude per day, which is above the stated ceiling level. The price of oil moved lower for a collection of reasons including a slowdown in the global economy, a strong U.S. dollar and increasing production from non-OPEC members.

The world watches the price of crude oil. When it moves lower, there are winners and losers on an economic basis. The winners are consumers. As oil is an important cost of goods sold component for many companies, profits tend to rise for these consumers as their energy costs decrease. A great example of this is the airline industry. Jet fuel, an oil product, is perhaps the single largest cost component of running an airline. As the price of oil moved lower in early 2015, the price of many airline stocks rose reflecting increasing profits from declining fuel costs. This is just one example of an industry that benefits from falling oil prices. Individuals have also benefited, lower oil prices means it cost less each time a consumer fills up their automobile at the gas station or heats their homes during cold weather periods.

Therefore, lower oil prices mean more discretionary cash for individuals. The losers, when it comes to lower oil prices, are clearly the producers and those who invest in the oil production industry as their profits drop.

Oil is a highly volatile commodity. In 2008, the price of crude traded on the NYMEX division of the Chicago Mercantile Exchange (CME) peaked at over $147 per barrel. Due to the global financial crisis, the price fell to $32.48 in a six-month period. This is just one example of the volatility of the price of this energy commodity. In 1990 when Iraq invaded Kuwait, the price of crude oil doubled from $20 per barrel to $40 over night. Today, the Middle East continues to be a turbulent region — instability in Iraq and tensions between Iran and Saudi Arabia have led to violence.

These issues certainly threaten not only oil production but also present the potential for logistical issues in terms of shipping crude oil from the region to the rest of the world. Therefore, it is always possible that a sudden rise in this tension will directly affect the price of oil.

Crude oil remains an important energy commodity today and geopolitical concerns are sure to add volatility and

Crude Oil and Geopolitics Conclusion

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