It was a bit of a roller coaster week for oil prices as geopolitical tensions between the US and Iran set off a spiral of attacks in the Middle East.
In Friday trading, the oil benchmarks dropped as both countries calmed the disruptive activity and the rhetoric. In Friday trading, Brent crude was priced above US$65 with WTI just below US$60 a barrel.
The oil price had been on the rise in the past six weeks, with Brent hitting over US$71 earlier this week.
The price has been inching up day by day, especially since last Friday when a leading Iranian general was killed by American forces.
Losing close to 6% on news of Iran “stepping down” activity and retaliation is an indication how important the war premium still remains and its perceived impact on oil supply from the region.
While the effect would have been greater five or ten years ago, the threat of disruption still worries traders and investors.
The fundamentals of the oil market should be back in focus in coming weeks if all stays quiet in the Middle East.
The US and other countries will help investigate the cause of the crash of the Ukrainian flight from Iran earlier this week that killed all passengers on board.
The UK and Canada say they have received intelligence to suggest the plane was hit by an Iranian missile that might have been “unintentional”, according to the Canadian Prime Minister, Justin Trudeau.
CNN obtained video of a missile being fired and hitting a target on the same night. A note to clients from JP Morgan said the bank believes there "remains some ongoing risk to output from geopolitical issues in the region".
There’s a combination of geopolitical issues in many countries around the Middle East, so the oil sector needs to be prepared for any escalation in tension.
The president of Prestige Economics, Jason Schenker says that the lack of casualties in this recent skirmish seems to be intentional, but any further disruption will impact markets, resulting “in a sharp spike in oil prices, a spike in gold prices, a drop in equities and other market volatility.”
With such uncertainty in the region, Schenker adds,” this is going to be a wild year of geopolitical, political and financial market volatility.”
Many analysts had feared disruption in the Strait of Hormuz, the main shipping lane for Middle East oil supply.
Speaking at the Gulf Intelligence Energy Forum in Abu Dhabi this week, the UAE energy and industry minister Suhail al Mazrouei said, “the market is well supplied and OPEC and its allies are able to meet global demand in case it is required".
Despite the situation in Iraq where tensions have been escalating in recent weeks, the OPEC Secretary General, Mohammad Barkindo, also attending the Forum, said that Iraq was still producing oil and facilities were safe.
When asked about compliance to the OPEC production agreement, he replied that “Iraq is gradually ramping up the level of compliance,” adding, “we’re optimistic they can do it.”
Ship insurers will be increasing costs and this will no doubt be added to goods and services carried through waterways in the region. The head of marine and trade at DWF Law in the UK, Jonathan Moss says, “recent tensions will lead to insurers and reinsurers imposing draconian conditions in policies, significantly increasing the costs of specialist insurance and pulling out of underwriting certain lines of business.”
So, as we begin another eventful year in the oil market, we’re seeing more than adequate supplies as the economic climate remains subdued.
Schenker remains hopeful and also notes that this will be a year “with global quantitative easing tailwinds and a likely end to the global manufacturing recession.”
This should in turn be good for demand and supportive for commodities, particularly in times of oil oversupply. American crude stocks continue to rise and US gasoline inventories were also up last week, according to the US Energy Information Administration. Inventories are currently at their highest in four years.
The oil market has been over-supplied in the past at the beginning of the year and in these few short weeks, it’s clear to see the volatility caused by a number of factors.
While the world needs peace in the Middle East, stability and certainty can go a long way towards boosting economic growth and in turn support oil demand growth.