Changes in the geopolitical environment have a strong impact on oil prices around the world. When political tensions prevent a nation from exporting its oil abroad, the available global supply of crude plummets which could send prices skyrocketing.
Although the world has enjoyed stable and inexpensive oil since 2014, Matt Badiali believes there are several factors that threaten to drive prices back to their former highs. In fact, the risk factors that prevail in today’s oil markets could even drive prices past $100 a barrel. Investors who enter the market today could realize significant gains if one or more of the geopolitical factors that analysts are highlighting become a reality.
Competition in Futures Contracts
The U.S. dollar has dominated energy markets since the Bretton Woods agreement was established in 1944. Almost all of the nations that lead in energy production, including Saudi Arabia, Iraq, and the U.S., export their oil exclusively in U.S. dollars. Nations prefer to use the U.S. dollar because it offers maximum price stability. Additionally, all major oil futures exchanges, such as the West Texas Intermediate, sell their contracts exclusively in U.S. dollars. Oil is easy to exchange around the world since buyers and sellers do not have to worry about the difficulties and costs associated with foreign exchange.
According to Matt Badiali, most nations are content with the status quo that prevails in the oil markets, but China is seeking to develop a competing system. China is opening an exchange that trades yuan-denominated crude futures contracts. The exchange is based in the Shanghai Free Trade Zone, so market participants from around the world will be able to buy and sell the new contracts on the global market.
As the Shanghai International Energy Exchange grows, oil prices denominated in U.S. dollars may increase proportionately. Investors wishing to succeed in the current oil markets will need to keep a close eye on the progress of China’s new exchange.
As you can see, the rig count climbed to 834 in the first week of May. That’s a 164% increase in drill rigs in two years. However, with oil prices over $70 per barrel, I expect that to change rapidly.https://t.co/nUS2hS12EF#Oil #OilRigs #DrillRigs #OilPatch #OilMarket #Stock pic.twitter.com/k76mXIrpWR
— Matt Badiali (@MattBadialiGuru) May 11, 2018
The War in Yemen
Yemen has become a hotbed for terrorism in recent years as groups, such as ISIS and al-Qaeda, have succeeded at gaining a foothold on its territory. The nation’s most serious driver of instability, however, is the success of Houthi rebels that are funded by Iran. The rebels took over Yemen’s capital, Sanaa, in 2015, and this led to the direct intervention of Saudi Arabia. The conflict remained a localized issue until March 26, 2018, when Houthi rebels launched a ballistic missile attack against Saudi Arabia’s capital of Riyadh. Although the missiles were shot down before they reached their intended targets, the growing capabilities of the Houthis are alarming geopolitical analysts and investors alike.
If the Houthi rebels or terrorist groups in Yemen succeed at hitting one of Saudi Arabia’s major oil production centers, the impact on energy markets could lead to a spike in prices. Investors need to keep track of Yemen’s conflict because Saudi Arabia accounts for 36 percent of the world’s oil production. An event that hurts oil exports in Saudi Arabia will lead to a serious supply shortage in other nations. Matt Badiali, a senior analyst at Banyan Hill, says that Saudi Arabia produces 9.9 million barrels of oil per day. Badiali has also stated that Houthi rebels can hit Saudia Arabia’s oil tankers traversing the Bab al-Mandeb Strait, so escalation in Yemen’s conflict could lead to major supply shortages worldwide.
Trump’s Decision on the Iran Deal
President Donald Trump has stated his opposition to the Iran deal since the early stages of his campaign in 2016. Trump’s presidency has been focused on domestic reforms, but he recently rescinded the Iran deal- and the geopolitical implications of this decision could be dire. Russia has threatened to make the U.S. face serious consequences for pulling out of the international agreement, and nations around the world will likely have a more negative image of the U.S. now that it has disregarded its obligations. Matt Badiali expects geopolitical tensions to continue to rise, which will in turn lead to a surge in oil prices.
Iran is also projected to start exporting a significant portion of the world’s oil. When the Iran deal was established, Iran was given the permanent right to sell the 3.8 million barrels of crude it produces each day on the international markets. Rescinding the Iran deal would, therefore, lead to a major shortage of oil in the global markets, so the price of crude would surge.
Matt Badiali suggests that investors looking to shield themselves from the impact of potential shortages related to the rescinding of the Iran deal should gain exposure to leading oil companies, such as Exxon, Chevron, and Royal Dutch Shell. Badiali also advises investors gain exposure to exchange-traded funds related to oil and gas to capitalize on changes in U.S. policy on Iran.
— Matt Badiali (@MattBadialiGuru) May 9, 2018
Venezuela has been consumed by a serious financial crisis that is destroying its economy in nearly all sectors. Foreign investors have pulled out of Venezuela in the aftermath of the nation’s crisis, and inflation has become out of control. Oil production has also been devastated by Venezuela’s economic woes. Although Venezuela produced 3 million barrels of oil per day in 1997, it now produces just 1.4 million barrels of oil per day. Analysts in the oil industry are now projecting that Venezuela’s production levels will fall by another 200,000 barrels per day by the beginning of 2019. If the crisis continues in Venezuela, production could potentially fall even lower, so investors need to monitor the situation in the struggling nation carefully to foresee future conditions in the global economy.
Much of Venezuela’s oil production comes from offshore rigs. Although the nation used to have 80 rigs in operation, it now has just 40 rigs actively pumping oil. Venezuela has already reached a low level of output, but it continues to export most of the oil that it produces. Matt Badiali believes that investors who take positions that would benefit from a rise in prices as Venezuela’s oil exports decrease are likely to realize significant gains in the long run.