‘Middle East effect’ on oil prices propels financial markets

A crisis in the oil-rich Middle East has historically meant an increase in oil prices; however this now seems a thing of the past.

The ongoing clashes in Syria, Russia’s intervention in the country, Daesh activities and finally the rising tension between Iran and Saudi Arabia, have all increased market expectations that oil prices will be driven higher.

In the past, these developments meant increased risk for secure oil supplies. However, market expectations for the increase of oil prices amid the stalemate in the Middle East are no longer materializing. On the contrary, oil prices have reached a new 12-year low and on Thursday, the benchmark Brent was traded at $32 per barrel.

“It is all a matter of excess supply,” Harry Tchilinguirian, the head of commodity markets strategy at BNP Paribas told Anadolu Agency.

He noted that OPEC's November 2014 decision to maintain and defend market share rather than reduce production to support prices has caused a lack of upward sensitivity to increased geopolitical tension recently.

After oil prices had begun falling in June 2014 from $115 per barrel, the oil cartel failed to present a unilateral decision and prices fell as low as $32 a barrel.

The overall clout of OPEC, once the world's most powerful organization in the oil market which influenced oil prices from the 1960s through the 1990s, is now in question in the face of other large producers like Russia and the U.S.

“Indeed, since the decision of OPEC to no longer adjust production as it once did, there is more and more oil offered than consumed, and this has been reflected in higher inventories of oil globally,” Tchilinguirian said.

Tchilinguirian underlined that OPEC's decision, led by Saudi Arabia, has one goal – driving out the higher cost producers from the market.

“This process will take time, first with the development of excess supply and lower oil prices leading to a reduction in investment decisions and ultimately the shutdown of production in higher cost areas,” he said.

Amin Nasser, the chief executive of Saudi Aramco, said last month that he hoped to see oil prices adjust at the beginning of 2016 as unconventional oil supplies start to decline.

“For now, with significant excess oil supply, the market is less sensitive to an escalation in geopolitical tensions, focusing on the excess oil supply instead, notably still resilient U.S. shale oil production,” Tchilinguirian said.

Another expert, Volkan Ozdemir, the head of the Institute for Energy Markets and Policies, EPPEN, agrees that the fit factor for oil prices has shifted.

Emphasizing that oil prices are determined by financial markets rather than the supply and demand equilibrium, Ozdemir added that with the Chinese yuan becoming more convertible, the strengthening of the dollar and poor conditions in global financial markets, a downward pressure on oil prices is apparent.

“I expect a daily 500 thousand barrels of oil production to drop in U.S. shale oil in the coming period. However, with the sanctions lifted, Iran is to increase its production by 1 million barrels of oil daily, therefore I do not expect a serious increase in oil prices until the beginning of 2017,” Ozdemir said.

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