Analyst asks if herd mentality will drive oil prices off the cliff

Geopolitical risk and strains from severe winter weather in the United States drove crude oil prices up almost 2 percent in less than a week.
By Daniel J. Graeber Follow @dan_graeber Contact the Author   |  Jan. 8, 2018 at 9:23 AM
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Jan. 8 (UPI) -- A perfect storm of geopolitical risk and severe weather in the United States helped drive oil prices close to $70 per barrel, but will it last, an analyst asks.

A handful of analysts speaking to UPI during the long holiday weekend said geopolitical factors may be the drivers of a rally for crude oil prices.

This year started with Iran in the grips of one of its worst bouts of political unrest since the Green Revolution in 2009 brought the first glimpses of a challenge to the cleric-backed regime. Joe McMonigle, a senior energy analyst at Hedgeye Risk Management, said there may be some "geopolitical lottery tickets" in 2018, especially if U.S. President Donald Trump decides not to issue a waiver on Iranian sanctions as expected later this week.

The sanctions would impact the sale of the millions of barrels of Iranian oil moving through the European market at a time when traders are watching a shrinking gap between supply and demand. Tight markets have little room for geopolitical risk.

"Gauging the probability of an oil supply disruption, calculating the likely magnitude and assigning it a premium is always tricky," Vandana Hari, a market analyst and founder of Vanda Insights, said in a weekend report emailed to UPI. "It makes for knee-jerk reactions in the oil market, upswings and corrections, as well as a more pronounced herd behavior in trade."

The price for Brent crude oil is up about 1.7 percent, or about $1.20 per barrel, since the start of the year and moving closer to $70 per barrel. Brent last closed above $70 in late 2014. By Hari's read, the rally so far in 2018 has been "spectacular."

Last week's surge was driven not only by geopolitical tensions, but severe weather in the eastern half of the United States, the world's leading economy. Frigid temperatures, more than a foot of snow and strong winds strained demand and the nation's grid.

But it's the geopolitical issues that have more of a market impact. Hari's group said that, collectively, the countries embroiled in conflict, from Iran to Venezuela, make up about 70 percent of what members of the Organization of Petroleum Exporting Countries produce each day.

Adding support to a price of crude oil above $50 per barrel is OPEC's determination to balance the market with coordinated production cuts. Shale oil producers, however, could spoil the OPEC effort if prices rally too high and at least some of the geopolitical risk may be temporary.

"So, a correction now appears overdue," Hari said. "The question is, what might be a trigger and how sharp a fall will it be."

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