What will the oil price do next?

Air strikes in Yemen and nuclear talks with Iran are pulling the price of crude in different directions.

by Adam Gale
Last Updated: 17 Dec 2015

Betting on oil is perhaps more akin to blackjack than to roulette -some skill is involved but it’s still gambling. There are simply too many unpredictable variables for the market itself to be predictable. Nonetheless, broad political and economic developments usually mean it’s possible to make an educated guess.

It’s particularly tricky to guess the price right now, however, because there are good reasons to think it could surge or tank, depending on how two political situations in the Middle East develop.

Saudi Arabia’s airstrikes against Shia Houthi rebels in Yemen are acting to increase the oil price. Last week, US crude rose $5 to $54 a barrel on fears that the supply of the black stuff could be hit. Yemen itself isn’t a big producer, but the air strikes threaten to destabilise Saudi itself.

Saudi’s Shia population is concentrated in the oil-producing eastern provinces, so a deterioration in Sunni-Shia relations could expose the country’s oil infrastructure to greater terrorism risks, both from disgruntled Shia and from al-Qaeda, which is increasingly active in the Arabian peninsula. The biggest risk, though, is perhaps on the Bab el-Mandab strait, a strategic bottleneck on the south-west tip of Yemen.

While Saudi has a formidable defensive infrastructure, much of it surrounding its oil facilities, the market did respond to what it saw as an increased supply side risk. But prices didn’t rise this week. Instead, they fell back to $49 barrel in expectation of a deal between Iran and the West over its nuclear programme.

A deal at the talks in Switzerland would end the US oil sanctions that effectively froze Iran out of the market for decades. This could allow Iran, which is estimated to have 9% of the world’s oil reserves, to flood the markets with millions of barrels a day.

Or it would, of course, if the two sides actually do make a deal tomorrow, when the talks conclude. A US State Department spokesman said the chances were ‘fifty-fifty’. Besides, it would take Iran a while to get its production up to peak levels, given decades of underinvestment in its technology and infrastructure.

While events in Arabia might push the price suddenly up and events in Iran might push them suddenly down, longer term trends point to persistently low prices this year and next, as US production continues to increase, albeit at an ever slower pace.

Unless, of course, OPEC does cut production, or splits apart over the policy of keeping production high, or economic growth and oil demand pick up again in Asia, or…

Come to think of it, perhaps it is better just to stick to roulette after all.


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