The geopolitical landscape affecting crude oil prices has shifted dramatically since 2009 – 2013, when the U.S. became one of the world’s largest natural gas and petroleum hydrocarbons producer, matching the output of both Russia and Saudi Arabia, according to a Brookings Institute report.
Several companies are responsible for the majority of U.S. oil production, each making their own individual decisions regarding production and investment. Because these companies are working competitively, U.S. companies in the oil industry are not working collaboratively to achieve geopolitical aims, unlike OPEC producers. Not only would an attempt by U.S. companies to manipulate market prices be economically counterproductive, it would also constitute a violation of antitrust laws.
As it stands, despite increased production capacity, the U.S. is still importing up to 10 million barrels of crude a day to fulfill demand. In other words, the U.S. is not insulated from geopolitical factors affecting global supply.
Here Are 4 Current Geopolitical Risk Factors to Keep on Your Radar
1 – Saudi Arabia
When oil prices reached $115 in 2014, oil producers somehow assumed that $100 per barrel would become the “new normal” in price, perhaps owing to the notion that the world was reaching peak oil. As the fracking industry exploded, flooding the market with new oil, both OPEC and Saudi Arabia began losing their competitive ground, that is, until the price of oil began to crash, sinking to the mid $20’s, before spiking again to around $81 per barrel.
Despite the U.S. boom in oil production, Saudi Arabia still has the largest oil reserves in the world, and their production costs are much lower than most other global producers. This means that they have the advantage of exerting considerable influence on global oil supply, and by extension, global oil prices.
For example, should Saudi Arabia decide to cut oil supplies, such a maneuver could cause the U.S. to use more of its own, potentially spiking the price of oil. On the other hand, if Saudi Arabia decides to increase oil production, not only would this flood the market with oil, it could potentially depress prices, perhaps to a point that might be significantly detrimental to U.S. companies in the fracking industry (as their cost of production and investment might exceed their potential revenue).
2 – Iran and the Strait of Hormuz
A key route in the flow of oil supplies connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea, the Strait of Hormuz is a “chokepoint” through which over 18 million barrels of oil per day flow. In 2011, Iran threatened to block the Strait of Hormuz, sending the price of Brent soaring. In anticipation of these type of situations, the US does maintain a strong naval presence in the region, but the 2011 scenario reminds us of the ways that the politics of this region can affect global oil prices.
3 – Yemen Crisis
Since 2015, Yemen has been the site of a proxy war between Iran and Saudi Arabia. Among the key targets that the Iran-aligned rebels have been attacking are the Saudi Aramco oil facilities and Saudi oil tankers. In addition to these risks, all of which directly affect Saudi oil production, is that Yemen is located along another major supply chokepoint–the Red Sea–through which millions of barrels are transported daily from the Suez Canal to Europe.
4 – OPEC
Unlike U.S. producers who operate independently, OPEC operates like an international cartel. Founded by five countries in 1960–Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela– they were later joined by Qatar, Indonesia, Libya, the UAE, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea, and Congo. If OPEC countries find oil prices to be at an unsatisfactory level, the mere “pledge” to cut supply can cause a spike in oil prices. In some cases, the announcement of supply cuts will raise revenues to an extent that an actual cut in supply–which can hurt revenues–may not be necessary. OPEC can also opt to increase supply, as they did in June of 2018 to compensate for Venezuela’s decreasing output.
In the end, however, OPEC’s influence over oil prices are temporary at best, especially considering North America’s emergent role as a major producer. The forces of supply and demand ultimately determine price equilibrium in the markets.
How to Trade Geopolitical Events
As an investor or trader, not only might you want to keep a close eye on crude oil inventory reports, you might also want to consider monitoring the geopolitical climate surrounding the main OPEC countries, Russia, and China. Geopolitics goes well beyond the scope of oil, and into general matters of trade and currency.
For instance, you might want to evaluate what China’s Petroyuan futures might mean for the future of the oil trade and the Petrodollar (as the Petroyuan is also referred to as an oil for yuan for gold trade).
OPEC discussions are often announced before they take place, potentially giving you enough time to analyze the market for possible trading opportunities. But not all factors affecting oil are announced or publicly seen through the public forum of financial media. So, if you trade the crude oil market, you may be ultimately responsible for keeping tabs on the geopolitical dynamics surrounding this commodity.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.