Hard economics overtakes geopolitics for oil

02 October 2014

Oil prices could stay below $100 a barrel for some time

The general rule for oil prices has always been that when bombs start going off in the Middle East, speculators get twitchy and its value rockets.

September bucked this trend, because as the US and its regional allies sent planes on bombing raids over Iraq and Syria, oil prices declined. As of 2 October, the price for Brent crude is $94.11 a barrel, representing a $15-plus decrease since July.

It seems geopolitical issues are being replaced by pure economics right now and there is a strong argument supporting this. The strong dollar, oversupply and weak Chinese economic data are all strong indicators that point to lower oil prices.

In terms of geopolitics, even the bombing of the Islamic State in Iraq and Syria (Isis) was not enough to eclipse this hard economic data.

Since the Arab Uprisings, oil prices have almost constantly been higher than $100 a barrel and major reason for this has been the uncertainty surrounding the Middle East, and not a question of supply. Even a ban on Iran exporting oil and wild fluctuations in Libyan post-civil war production has not caused serious disruptions to supply and other countries, such as Saudi Arabia, have been able to plug the gaps.  

Oversupply is the greatest threat to oil prices and there is no question this will worsen if Iran and Libya can resume full export activities. Non-Opec supply has grown by 1.8 million barrels a day over the past year and this is likely to rise even further as the US ramps up its non-conventional hydrocarbons production.

There is also an argument for the suggestion that speculators may have become complacent and do not view the Isis bombing raids as grounds for worry in a way they would have done at the turn of the decade.

In the past three years, oil prices have dipped below the magic $100 a barrel mark on several occasions only to return to triple digits shortly afterwards. This time, it feels different.

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