How can political events affect the oil price?

The oil market is heavily influenced by political announcements from the likes of OPEC and the US, the main oil suppliers and key drivers of the oil price. Here, we highlight some of the types of announcement any oil trader should keep an eye out for.

Oil
Source: Bloomberg

Crude oil prices are driven by a host of factors, but as with all commodities the balance between supply and demand is a key driver of price movements. What drives supply and demand? Recent history highlights political factors, new technology, and the decisions of major producer groups like the Organization of the Petroleum Exporting Countries (OPEC) as key influences.

Oil price benchmarks: There are three key oil prices that are used as reference prices for traders of crude oil: West Texas Intermediate (WTI), Brent crude, and Dubai crude.

Political factors that can move the oil price:

Middle east turmoil

One of the most obvious causes of political disruption that has influenced the oil market through the years is the Middle East. That’s hardly surprising, given the importance of the region for global supplies. The Middle East includes some of the world’s biggest producers of oil, including Saudi Arabia, Iran, and the United Arab Emirates (UAE).

The volatility of the region has significant implications on the supply of oil on a number of fronts, most notably owing to the impact on transportation. The stability of those oil producing nations and their neighbours is crucial to maintaining a global supply line. With that in mind, having an understanding of the region will determine where to look for potential threats to output.

One flash point is in the strait of Hormuz, which transports oil and gas from Iraq, Kuwait, Saudi Arabia, Qatar, and the UAE. Any disruption to this region will have significant effects upon global crude prices, given the impact on supply. The Iranian threat to block the strait of Hormuz in 2011-2012 is a prime example of how political posturing can make a significant impact on market valuations, even when no action is ultimately taken.

Looking at the other part of the shipping route, the Suez Canal is another pinch point that can be disrupted, owing to political instability. With the canal running through Egypt, political and security threats to the region would also have a material impact on oil prices.

OPEC announcements

OPEC is made up of 14 key oil producing nations. Its largest producer is Saudi Arabia, and the other 13 are Iran, UAE, Iraq, Kuwait, Venezuela, Qatar, Libya, Algeria, Nigeria, Ecuador, Gabon, Equatorial Guinea, and Angola. 

OPEC accounts for a substantial amount of the world’s oil supply, and the formation of this cartel was done with a view to controlling the supply and thus the price of crude. This means that an oil trader will always have to keep a keen eye out for any developments coming from OPEC or any constituent countries. This will include announcements on whether OPEC is set to limit or expand the collective output of the group. Alongside that, it is worthwhile noting that such restrictions are not always adhered to, thus raising the importance of reports which clarify the production of each nation.

OPEC meeting

Your essential guide to Organization of the Petroleum Exporting Countries (OPEC) meetings – find out how they affect global oil prices and other energy markets.


US energy policy

President Trump’s decision to deregulate the US oil industry came at a time when the nation was already challenging some of the big hitters for the crown of world’s biggest oil producer. The country was by far the world’s biggest oil consumer for a long time, but new technology meant the advent of deep offshore fields and onshore shale oil sites spurred a boom in domestic US production. The key country in terms of demand is now China. Much of the US production is, however, higher cost than that of the traditional OPEC producers, and therefore US production levels do fluctuate.

With global warming at the forefront of political decision-making, the policy stance at any given time will also determine the gusto at which US producers pump crude. A more liberal leader like President Trump aims to raise growth by any means necessary, and his disbelief in global warming means that energy firms will be encouraged to raise output significantly. Conversely, a president with a more environmental focus would likely be willing to tax and regulate producers, with the view to meeting carbon emission targets. This restriction of supply would likely raise oil prices.

The image below highlights the impact that these types of events can have upon crude prices.

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