That old devil called geopolitics

If there is one takeaway from this week’s Oil and Money conference in London, it is that the industry’s big hitters are as wary as ever of the next 18 months.

But, just as the cautious messages were finding their way out onto the newswires, Brent was gasping into life. After nearly a month of flat-lining, it leapt suddenly above $50/bl to defy all prognoses of slow, suffocating death by oversupply.

Why now? Isn’t there still more oil in the market than needed? There is in the US, says the EIA  — crude stocks are up, gasoline stocks are up and demand is down. Globally, is economic growth sufficient to soak up the excess? Doesn’t look like it, says the IMF, which sees “more pronounced” downside risks to growth. Is the Chinese economic slowdown leeching out into other successful economies? Yes, if the latest German data are anything to go by — orders from outside the eurozone fell by 3.7pc on the month in September, a month when Volkswagen was still happily selling diesel cars.

But the price bulls’ old friend, geopolitical risk, blew back into town just as the fundamental diagnoses were once more moving bearishly.

Middle East risk as a rationale for oil price moves is as old as the futures market. As Opec secretary-general Abdullah al-Badri said this week, for decades, at least one member has been on the US sanctions list, and this is still the case, at least until the embargo on Iran is lifted.

It hasn’t always taken the sight and sound of tanks and jets in the region to send shivers through the oil market — mere sabre-rattling has done the trick in the past. But what’s happening in the skies over Syria now is both something of a throwback, and something new entirely. The cold war’s Great Game was played out in part in the deserts of the Middle East, but never before have direct Russian and US military objectives been targeted on the same patch of earth.

Link this with the prospect of spillover into Turkey — such an important transit country for energy supply — and with noises off in Iraq enthusing about the possibility of Russian intervention in its own war against the Islamists of Isis, and you have risk incarnate. And that’s enough to rouse Brent from its slumbers, for now. But with oil inventories so high, the reaction to risk is hardly going to be spectacular.

“I don’t know any investors who trade oil with political risk in mind. It just doesn’t pay and it has a negative carry. It’s too difficult a trade to put on,” Goldman Sachs head of commodities Jeffrey Currie said at Oil and Money. “Geopolitical risk has never been higher but oil at risk has never been lower.”

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