War, sanctions, political strife to drive oil prices higher

War, sanctions, political strife to drive oil prices higher
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At first blush, one might expect a major meeting of Organization of Petroleum Exporting Countries (OPEC) and its associate non-OPEC producers in Algeria on Sunday, would have impact on developments in the global oil market.

Yet, the formal gathering will matter far less than less-visible and seemingly unconnected trends: a rise in geopolitical risks and new data showing a further tightening in the global oil market.

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Geopolitical events have an outsized impact on the global oil price when supply and demand are close. Indeed the global oil price, which currently is close to its highest price of the year, is expected to climb even higher by the end of 2018.

There are geopolitical risks galore: This week’s downing of a Russian military plane over Syria highlights the potential for conflict to escalate there given that U.S., Russian, Iranian, Turkish and Israeli forces and multiple terrorist groups are all operating on or above Syrian territory.

Meanwhile, the Syrian army operates antiquated and inaccurate air defense systems. The parties risk having conflicts spill over to other regions and even potentially directly hamper some oil trade.

Already, global oil supplies have been dropping as Iranian oil exports have plunged in anticipation of the re-imposition of U.S. oil sanctions on Iran in early November, and Venezuela’s economic meltdown has further slashed its exports.

Developments in Iran and Venezuela will lead to additional declines in supplies to the market. Instability in Libya and Iraq may pull additional supplies offline.

The market may start to factor in rising instability in Iran, some of which is concentrated in Iran’s Khuzestan region, the center of its oil production. At this point, it doesn’t seem that the market is reflecting this potential development, which would lead to even less oil supplies. 

This week, the U.S. Energy Information Agency (EIA) released data that showed that U.S. crude stockpiles have continued decline for the fifth-straight week and are now at their lowest level since February 2015.

U.S. gasoline stocks have also declined. The Brent global oil price reached $80 a barrel last week and is clawing back up toward $80 this week as well.

To reverse the rising oil price trend, the Trump administration will most likely release supplies from the U.S. Strategic Petroleum Reserve so that the price at the pump does not skyrocket and affect the midterm elections. However, release of these supplies cannot influence long-term market fundamentals. 

Amid all these developments, the Algeria meeting is unlikely to alter major market trends. Still, the fact that the meeting is taking place at all reflects how much OPEC and non-OPEC cooperation — especially with Russia — has been cemented in recent years. OPEC—Russian cooperation in the oil market was almost unthinkable three years ago and now is mundane. 

It should be noted that Iran is sitting out Sunday’s meeting. This signals the continued tension between Iran and Saudi Arabia but also a potential new misalignment between Russia and Iran. Despite their long-standing cooperation, their stances and interests differ on a number of issues.

Most recently, Tehran succumbed to Russian pressure to accept an agreement on delimitation of the Caspian Sea that affected oil and other rights, and the two countries’ different goals in Syria may pull them further apart.

After losing a plane, Moscow may want to lower tensions in Syria, which would mean restricting Iran’s deployments. Washington should identify and explore additional issues of dispute between Tehran and Moscow. 

With the current tight global oil market and the abundant geopolitical risks, the global oil price should continue to rise through the end of 2018.

The most important factor that will reverse that trend is actually caused by the rise of the oil price itself: potential declined economic growth, especially in Asia, which would lead to less demand for oil.

While the OPEC and non-OPEC ministers meet in Algeria, it is important to remember that OPEC and other political groupings cannot affect the fundamentals of the market, which shape the global oil price.

Brenda Shaffer is a specialist on energy and foreign policy. She is a visiting researcher and professor at Georgetown University’s Center for Eurasian, Russian and East European Studies and a senior fellow at the Atlantic Council’s Global Energy Center. She is the author of  several books, including "Partners in Need: the Strategic Relationship  of Russia and Iran" and "Energy Politics."