The oil and gas industry, perhaps more than any other, is uniquely tied to geopolitical forces. For instance, experts say the recent glut in oil supplies has occurred in part because of U.S. efforts to depress the Russian economy, and increased cooperation between the countries has some energy analysts feeling optimistic again.
This November brought another clear example of the way geopolitical tensions can impact the oil market. When Turkey shot down a Russian fighter jet near the Syrian border, U.S. indexes saw an immediate selloff. Wall Street reacted as soon as the news broke, as investors feared a confrontational response from Russia.
Just hours later, after Russian President Vladimir Putin spoke to the press, oil prices rallied. Riding a wave of strong economic data in the U.S., oil prices went up more than 2% by the end of the day.
“You came in this morning and everybody was talking about this potential escalation of violence between Turkey and Russia,” said Andrew Frankel, co-president of Stuart Frankel and Co.
The U.S. is the world’s third-largest oil-producing country behind Saudi Arabia and Russia. In 2014, the U.S. produced about 8.7 million barrels of crude oil daily, which contributed to the petroleum industry’s current oversupply problems.
Looking ahead, experts say the next big shakeup in oil prices will depend on a Saudi Arabia-Iran deal regarding output. Saudi Arabia released a statement recently saying it would work with other large producers to stabilize prices, while possibly sacrificing its own output for Iran’s sake.
Of course, the success of any OPEC agreement will depend on a number of geopolitical issues. And according to Reuters’Andy Critchlow:
“The geopolitics are fast moving. But logic points to a compromise deal. Saudi Arabia and its close Gulf allies could make modest cuts that allow Iran to increase output within the current OPEC ceiling. Such moves would also help appease agitating voices within OPEC, such as Venezuela’s. And this could be done without reversing OPEC’s grand strategy of winning back market share from higher-cost non-OPEC producers such as Russia and the United States.”
And there’s no telling what could happen before the OPEC meeting.