The attacks in Paris raised the prospect of greater geopolitical strife, as France responded with stepped up airstrikes in Syria and the West promised further action against the Islamic State.
Typically, such a development tends to push up oil prices, as a greater geopolitical risk premium is slapped onto the price of crude. The uprising in Libya in 2011, in a glaring example, caused oil prices to shoot up. Related: Oil Market Supply Imbalance Getting Worse, Not Better
At the same time, oil markets can trade on countervailing sentiment when conflict arises. While violence in the Middle East tends to push up oil prices, the attacks in Paris also raised concerns over France’s (and the EU’s) economy, which can have a depressing effect on oil prices.
On balance, though, oil prices moved down on November 16, largely due to two trends that are viewed as much more significant than the Paris attacks or the subsequent western response. First, oil storage levels have risen quickly in recent weeks, pointing to an ongoing (and maybe even increasing) problem of oversupply. Crude inventories in the U.S. are nearing 80-year record highs, and around the world storage is also filling up. The IEA says global storage levels are breaking records. Related: Oil Tankers Are Filling Up As Global Storage Space Runs Low
The Paris attacks alone will not be able to overcome this trend – only a geopolitical risk in a major oil-producing country that affects supplies will significantly move the markets at this point.
Second, Japan reported that its economy fell into recession in the third quarter, dampening sentiment about the trajectory of the global economy. Japan’s economy shrank at an annualized rate of 0.8 percent in the third quarter, following a 0.7 percent annualized contraction in the second quarter. Japan is in the top five in terms of global crude oil importers, so weakening demand puts a chill on global demand. That’s bearish for oil prices. Related: Is The Oil Industry Really Subsidized?
The news comes as China’s demand for crude is no longer growing at the rapid rate that it once was. Softer demand for oil in Asia, which has been the engine of demand growth over the past decade, is slowing the rebound in oil prices.
WTI flirted with sub-$40 per barrel oil as of midday trading on Monday.
By Charles Kennedy of Oilprice.com
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