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This week two events have occurred that may indicate the situation in two global hotspots is getting worse, and both have the potential to have a significant impact on crude oil prices in the future.
First, the Islamic State (IS), the terrorist group formerly known as the Islamic State of Iraq and the Levant (ISIL), attacked the Mosul Dam.
Second, the mayor of Kiev in Ukraine turned off the hot water.
Neither one of these is a good sign and each promises to shake up gas and oil prices moving forward…
The Uncertainty Factor and Crude Oil Prices
Now, it is true: We have just come out of a trough in crude oil prices.
Through close on Friday, West Texas Intermediate (WTI) – the daily benchmark set on the NYMEX in New York – had shed 5.5% for the month and 4% for the most recent week. Meanwhile, BRENT, set in London, had given back 2.5% for the month and 1.8% for the week.
At first view, this seems very counterintuitive…
How could the two primary global pricing standards be falling in the face of three major global crises (Ukraine, Iraq, and Gaza)?
Increasing tension, after all, is supposed to translate into angst, then into market uncertainty, followed by volatility – all resulting in higher prices.
But in this case, two separate factors have subdued the expected trend. The "normal" spike in prices has been curbed by both the time of year and the curious way in which traders calculate geopolitical impact.
The first has to do with the winding down of the peak driving season and the dog days of summer cutting into oil demand.
The second refers to those who really set the price of crude oil, essentially by playing the spread between futures contracts for the product ("paper" barrels) and actual shipments to meet market demand ("wet" barrels).
For these guys, a crisis just isn't a crisis unless it has staying power. Futures contracts allow a significant amount of arbitrage, while the use of options provides a way to insure against significant moves in either direction.
At least in normal times…
The trading world hates "open-ended" global problems. It's the uncertainty factor, rather than the actuality, of a crisis that unnerves the traders (and the resulting price). But if the situation can be contained, it is discounted as a concern.
The Dam That Could Unhinge Iraq
Well, now two things have happened that may just unhinge this trading system.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.