Oil Price Increase a Small Reminder of Volatility

The slight rise in the price of oil doesn’t necessarily signal that cost levels of just about a year ago will return quickly. Significant oversupply of crude in the market remains, but the latest hike serves as a reminder of just how fragile and volatile the oil market is and how quickly a period of low prices can end.

The production of oil has been the topic of conversation in most circles as it has been changing drastically, albeit over a fairly short period. The emergence of the United States as a major world producer thanks to shale oil revolution has set off a chain reaction through the oil world, one that altered strategies. In past years, an oil glut would have been halted with a decision from OPEC to restrict production. This time, such production restrictions remain absent as it would appear that OPEC is almost powerless to alter the current path of pricing. Problematically, too many nations reliant on whatever revenue they can get from their oil have no intention of reducing output regardless of the price.

If oil-producing nations won’t cut output voluntarily, the reduction in oil supply will have to result from some other event(s). Libya provides such an example: violent unrest. A near civil war is breaking out in this fractured nation, and the sense is that various combatants want the oil to flow—the fighting is over whom controls the money that oil generates. The prediction is that Libyan oil could essentially vanish from the world supply for a time. While far from a huge dent in the global supply, markets sometimes react to even small geopolitical threats. Libya is certainly not the only oil producer with political issues. Markets would react even more rapidly and strongly to issues in Iran, Nigeria, Angola and so on.

The point is that many things can happen to interrupt the supply of oil and, if these occur, the existing glut that is holding prices down will evaporate and prices will rise once again.

- Chris Kuehl, PhD, NACM economist and founder of Armada Corporate Intelligence

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