Crude Oil’s Scary Geopolitics

Crude Oil’s Scary Geopolitics

One of the biggest risks to the stability of oil prices is the rift between Saudi Arabia and Qatar

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There’s plenty to think about if you’re a crude oil trader, whether you are long or short. Crude oil used to be the most volatile contract one could trade until cryptocurrencies came along. Interestingly, Bitcoin and its ilk may hand that title back over to crude oil in the very near future. OVX is the CBOE’s volatility index for crude and like the stock sensitive VIX in 2016, it has been trending lower the last 2 years as crude prices rose slowly and steadily. Yesterday the OVX closed at 28.05. in February of 2016, it had a monthly range of 58.09 to 81.12. The OVX has remained below 50 every month but 2 since June of 2016 and is likely due for a spike just like it’s equity-based cousin, the VIX.

Some New Tensions

When one examines potential reasons for a spike in crude oil volatility, there are some serious potential geopolitical risks. Some are right in front of us, such as fallout from the U.S. pulling out of the Iranian nuclear deal and the collapse of Venezuelan supply. There is also a recently revealed risk within OPEC itself. The Diplomatic crisis involving Qatar in which several countries led by Saudi Arabia abruptly cut off diplomatic relations with Qatar in June of 2017, could turn to a military conflict. According to sources referenced in the French newspaper Le Monde the Saudi’s have asked the French to intervene and stop a proposed deal for Qatar to buy missile defense systems from Russian. The story further claims that King Salman threatened military action if the sale goes forward and the systems are installed.  This could cause a fast crude price spike, followed by a swift crash as the OPEC lead production cuts fall apart and members start pumping like crazy, followed by a spike as oil wells become military targets. Or the other way around. Or both moves on the same day. These tensions turning to a military solution would be that confusing of a situation, in terms of what it meant for production. One thing is certain though; if this heats up, crude will be the kind of volatile that risk-aware traders dream of.

 

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