Mapping Oil Market Volatility

Abstract

The global market price of oil is a closely watched benchmark of current and expected global economic and geopolitical conditions. After reaching $107 per barrel in mid-2014, world oil prices have fallen significantly — trading at $29 per barrel as of February 12, 2016.

Wikistrat ran a unique voting exercise in February to assess the impact that geopolitical and economic events would have on oil price volatility. Of the 15 scenarios rated most likely to cause an increase in oil prices, all events were related to geopolitics and terrorist attacks — not to economic or regulatory changes. Thus, the most salient macroscenarios were those composed of a terror event and geopolitical event (not necessarily related to one another), with only minor influence from an economic/environmental event or technological/supply event.

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Bottom Lines

  • With oil fundamentals leading to low prices and only a slight price increase over the next year due to current oversupply, geopolitics and terrorism remain the largest drivers for oil price variations in the short term. In particular, only strong, sudden (“shocking”) events would have the impact power of “winning” against fundamentals in bringing prices up rapidly. This is also the case because of the reversal of financial speculation expectations.
  • Threats to supply lines (especially sea lanes) could impact prices upwards — especially if multiple threats arise that limit alternative routes in key areas. An increase of prices would be caused both by a direct threat to supplies and to indirect effects like higher insurance premiums for oil tankers imposed by insurance companies.
  • The U.S. remaining a leading producer will help keep prices low, especially if coupled with emerging economies continuing to struggle.
  • In particular, a Chinese economic crisis involving stock market crashes and slowing growth forecasts were voted as having the largest downward effect on oil prices.
  • Trouble in Saudi Arabia is considered a key factor in future oil price increases. In particular, a possible ISIS attack on (or seizure of) the Grand Mosque in Mecca was voted to have the most significant increase on oil prices due to the shock effect and fear of the country and its oil assets becoming frequent targets.
  • Markets have already “absorbed” the thought of Libya’s oil production being threatened. Therefore, only a solution to the crisis would provoke an effect, lowering prices if stability (and production) return to higher levels.
  • In general, ISIS and other terror groups are considered a threat to oil markets only if they severely impact key producers like Saudi Arabia.
  • Due to current oil fundamentals, geopolitical and economic issues partly reducing marginal players’ production (like Indonesia) are not considered relevant enough to provoke an increase in prices.
  • The European immigration crisis, Brazilian political stability and a Saudi nuclear program were assessed to have little to no impact on the price of oil.
  • A growth in gas reserves alone is considered to have only a limited effect on oil prices due to often non-linked dynamics.

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