• 5 hours Tesla Is “Headed For A Brick Wall”
  • 10 hours Norwegian Pension Fund Set to Divest From Oil Sands and Coal Ventures
  • 14 hours IEA: “2018 Might Not Be Quite So Happy For OPEC Producers”
  • 15 hours Goldman Bullish On Oil Markets
  • 17 hours OPEC Member Nigeria To Issue Africa’s First Sovereign Green Bond
  • 19 hours Nigeria To Spend $1B Of Oil Money Fighting Boko Haram
  • 21 hours Syria Aims To Begin Offshore Gas Exploration In 2019
  • 23 hours Australian Watchdog Blocks BP Fuel Station Acquisition
  • 1 day Colombia Boosts Oil & Gas Investment
  • 1 day Environmentalists Rev Up Anti-Keystone XL Angst Amongst Landowners
  • 2 days Venezuelan Default Swap Bonds At 19.25 Cents On The Dollar
  • 2 days Aramco On The Hunt For IPO Global Coordinators
  • 2 days ADNOC Distribution Jumps 16% At Market Debut In UAE
  • 2 days India Feels the Pinch As Oil Prices Rise
  • 2 days Aramco Announces $40 Billion Investment Program
  • 2 days Top Insurer Axa To Exit Oil Sands
  • 3 days API Reports Huge Crude Draw
  • 3 days Venezuela “Can’t Even Write A Check For $21.5M Dollars.”
  • 3 days EIA Lowers 2018 Oil Demand Growth Estimates By 40,000 Bpd
  • 3 days Trump Set To Open Atlantic Coast To Oil, Gas Drilling
  • 3 days Norway’s Oil And Gas Investment To Drop For Fourth Consecutive Year
  • 3 days Saudis Plan To Hike Gasoline Prices By 80% In January
  • 3 days Exxon To Start Reporting On Climate Change Effect
  • 3 days US Geological Survey To Reevaluate Bakken Oil Reserves
  • 4 days Brazil Cuts Local Content Requirements to Attract Oil Investors
  • 4 days Forties Pipeline Could Remain Shuttered For Weeks
  • 4 days Desjardins Ends Energy Loan Moratorium
  • 4 days ADNOC Distribution IPO Valuation Could Be Lesson For Aramco
  • 4 days Russia May Turn To Cryptocurrencies For Oil Trade
  • 4 days Iraq-Iran Oil Swap Deal To Run For 1 Year
  • 6 days Venezuelan Crude Exports To U.S. Fall To 15-year Lows
  • 7 days Mexico Blames Brazil For Failing Auction
  • 7 days Norway Allows Eni To Restart Goliat Oil Field In Barents Sea
  • 7 days Malaysia Suggests Muslim Countries Stop Trading Oil In U.S. Dollars
  • 7 days Kinder Morgan Wins Appeal To Start Trans Mountain Work
  • 7 days Mexico Cancels Deepwater JV Tender Due To Lack Of Interest
  • 7 days Oil Drillers Give Cold Shoulder To Alaska Bidding Round
  • 7 days Budweiser Bets On Tesla To Replace Its Fleet
  • 8 days Forties Pipeline And Nearby Terminal Disrupted After Oil Leak
  • 8 days Major Nigerian Union Threatens Strike After Mass Firing Of New Members

Breaking News:

Tesla Is “Headed For A Brick Wall”

Kent Moors

Kent Moors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment. His…

More Info

How To Play The Energy Market As Global Tensions Rise

Oil shipping terminal

Much of my earlier career in intelligence was based on a simple assumption. It was the kind of approach the “craft” shares with a number of other pursuits.

One expects that the usual usually happens.

You look for outliers, patterns that don’t fit the normal profile, or events emerging from unexpected quarters. Everything else is largely ignored, filed away, or filtered out.

Which makes the primary approach energy pundits have to geopolitical elements curious.

Perhaps it’s because some of them are so young they have no genuine personal experience to fall back on.

Or maybe it’s a reflection of this crowd’s pervasive lack of any historical understanding that requires something further back than a 200-day moving average.

Many of these commenters paint the rise of a global flashpoint as an exception to some “rule.”

The textbook (and largely fictitious) portrayal of a normal market in which supply and demand intersect to create price without any other factors intervening is still regarded as what markets do most of the time.

In other words, the thought is that the usual usually happens, with an event now and then upsetting the “natural” order of things. Maybe that was the case a century ago.

But it’s certainly not today, with immediate worldwide news, followed (unfortunately) by half-baked immediate analysis.

The difference here is striking. Crisis is not the exception.

Crisis drives the energy markets because it has been the main ingredient producing swings in prices for some time.

Actually, the connection between international crises and the price of crude oil has been rather direct. The reason is straightforward.

Four Hotspots are Driving Uncertainty

Uncertainty drives the movement of prices.

Price ranges are jarred by any increase in global uncertainty, whether or not there is an immediate translation into a pressure either on the supply or demand side.

Ask any trader.

Without exception, they’ll tell you that markets prefer predictability to any other factor.

As a result, current tensions around the world serve to provide a firming price floor. And remember, it’s the floor, not the ceiling, that really determines the pricing range. Related: Is This $25 Billion Nuclear Project A Go?

Aside from the localized situations that have a direct bearing on energy flows (for example, the ongoing civil war in Libya or the simmering Saudi-Qatari spat), four stand out as driving the energy “uncertainty factor.”

First, the additional U.S. sanctions imposed on Russia. You can read more about them here.

Second, an acceleration of unrest in Venezuela (with additional American sanctions about to be imposed there as well – click here for more details).

Third, the war of words between the U.S. and North Korea.

And fourth, the conflict over the resources in the South China Sea.

We’ve discussed the first two on several occasions here in Oil & Energy Investor. The new Russian sanctions have a rather direct connection to both the finance and flow of Russian natural gas into Western Europe, along with the prospect of making the import of liquefied natural gas (LNG) a more attractive alternative.

Of course, that dovetails nicely into American plans to export LNG to the continent.

The strong pushback from the Kremlin merely articulates what is already well known. The Russian central budget cannot survive without strong revenue flows from the export of oil and natural gas.

But the Venezuelan crisis has an even more obvious and dramatic impact.

Pundits are Forgetting About This Hotspot’s Effect on Energy

As a major member of OPEC (as well as possessing the largest crude reserves in the world), the domestic collapse there is prompting a rising concern over OPEC production and export levels.

That Washington, D.C., now has the Venezuelan state oil company PDVSA in its sights merely accentuates the situation.

But the dueling tweets between Washington and Pyongyang has filled the TV airways without the connection being made to energy flows.

Now the broader stock market ups and downs over the past several days certainly illustrate the pressure that can be applied when the prospects of military confrontation arise.

But the prospect of a nuclear-armed “hermit state” (North Korea) on energy flows is largely neglected.

Even though it already is affecting oil prices. Not because North Korea is a major producer or customer, but because of the broader uncertainty it generates.

Any military exchange between the U.S. and North Korea will immediately result in massive damage and loss of life in the South Korean capital of Seoul and the area surrounding it.

That will upset the energy trade in the larger region – the one that will drive global energy demand for at least the next three decades.

In turn, the weight any hostilities have on neighboring China would profoundly influence prospects for the super power’s clout in energy trade. Any perception of a decline in Chinese energy consumption or, more likely, a rise resulting from the hoarding of energy and minerals occasioned by war on its borders, will have a quick knock-on effect on prices.

And then there’s the pressure a conflict on the Korean peninsula would have on some of the most important oil tanker routes in the world…

Investments that Bridge Energy and Defense are the Key to Profits

Each of these factors provide a spike in uncertainty.

Remember, it’s the level commanded by futures contracts (“paper barrels”) rather than the actual cost of consignments in transit (“wet barrels”) that sets the price of oil. Those forward-looking “paper” barrels are very much the creature of what oil looks like months into the future.

And that is driven by traders’ perceptions.

The Korean crisis also runs the risk of heating up the fourth situation – the South China Sea. This one is another we have discussed at length in previous editions of Oil & Energy Investor.

Here’s the short of it: China has laid claim to huge swaths of the waters and resources that several other countries also claim. Related: This $65 Billion Oil Opportunity Will Never Be Tapped

In addition, Beijing has been energetically building artificial islands in the disputed South China Sea to extend its territorial zones and to serve as bases for military action.

What is done by or to North Korea will accelerate Chinese actions in the South China Sea, moves that have already placed it in direct collision with American interests.

Meteorologists will tell you that perfect storms result when insular disturbances combine. Geopolitical “storms” expand the same way.

It’s for all of these reasons that I’ve been bringing subscribers of all my services into cross-over investment plays that bridge energy hot spots and military/defense stocks.

The new normal of what’s happening worldwide dictates such a strategy.

By Kent Moors via Oil and Energy Investor

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment
  • Jeffrey J. Brown on August 12 2017 said:
    In late May, Neil Dwane, with Allianz Global Investors, prepared a report in which he outlines
    "Five reasons to expect higher oil prices."

    The five reasons are as follows:

    1) Global oil demand is reassuringly stable

    2) Multiple factors will constrain the oil supply

    3) New discoveries are dwindling

    4) The US shale industry has problems

    5) Domestic production is falling in a booming Asia

    Note that Mr. Dwane references Mexico as a point of concern, but Mr. Dwane did not get into Mexico's problem with net oil exports, and there is a good chance that Mexico's net oil exports will drop by about half from 2016 to 2017.

    In any case, Mr. Dwane was interviewed on CNBC earlier this month, and he made the following points:

    CNBC: There's still a major reason why oil could jump back to $120, experts say



    Oil supply could easily be threatened by geopolitical risks, and such a disruption could cause oil prices to skyrocket, experts tell CNBC.

    Neil Dwane, global strategist and chief investment officer of European equity at Allianz Global Investors, warned that oil production supply is looking threatened around the world.

    "Venezuela's 2 million barrels of oil a day could literally go any day. Mexico looks poor. Azerbaijan's in trouble. China's own production is collapsing rapidly," he told CNBC's Squawk Box on Friday.

    "One only has to have one mistake and the only thing you'll be talking about all morning is oil at $120."

    Dwane said geopolitical risks could cause prices to skyrocket as several oil producing states are fragile, and oil prices are currently too low for anyone to want to drill fresh wells which may be needed in the future.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News