Oil prices jumped 5 percent after Iran launched strikes against US military bases in Iraq in retaliation for the killing of commander Qassem Soleimani. But by Wednesday afternoon gains in crude had reversed, with prices trading lower than before the Iranian general’s assassination.
Having jumped when markets opened to as high as $71.75 a barrel, crude later dropped to below $66 a barrel, a near 9 percent peak-to-trough swing in the course of a day.
So why have oil prices failed to rally despite the tensions in the Middle East?
1. The crisis is expected to de-escalate. Global cues are meant to calm after Mr. Trump signaled that the US would not respond militarily to Iran’s attacks on American forces in Iraq, in a bid to de-escalate the crisis in the Middle East triggered by his order to kill Iran’s top general, Qassem Soleimani
2. Saudi Arabia’s state-backed oil tanker giant, Bahri, is temporarily suspending shipments through the Strait of Hormuz following Iranian missile strikes on US military bases in Iraq, according to two sources familiar with the matter.
[ How the Strait of Hormuz is used as leverage and weapon by Iran has been explained in my previous blog Dated: January 3, 2020: India's economy will suffer eventually as the US attacks Iran!!.]
Avoiding the possibility of direct involvement has also made the oil market a bit less fuzzy.
3. Russia Crude Oil Production is at a current level of 10.86M, down from 10.90M last month and down from 10.96M one year ago. This is a change of -0.37% from last month and -0.95% from one year ago. The fact remains that Russia has been trimming production for most of the past three years in an attempt to offset a surge in production from the US shale industry. So if the prices get too high, then the POTUS can ask his allies, including Saudi Arabia and the UAE, to boost production to help calm the market and calm down the prices.
4. Oil prices are already high: Some traders say the limited price reaction is simply down to oil having already risen strongly in the fourth quarter of last year, with prices gaining about $10 a barrel as concerns over weakening global growth and the US-China trade war receded. Hedge funds already have sizeable bets on rising crude prices, which have largely been established in the past few months, suggesting there may not be the appetite to keep adding more risk to portfolios without evidence of a genuine supply disruption.
5. Darryl Willis, a 25 year veteran of BP was hired by Google as the VP of Google Cloud Oil, Gas and Energy. And then he shifted to Microsoft as VP Energy Industry.
His LinkedIn Account: https://www.linkedin.com/in/darryl-willis/
Google has already signed up with Total to subsurface data analysis for oil gas exploration and production. Microsoft has already partnered with Exxon and Chevron. Amazon provides cloud services to BP and Shell. The Big Tech companies are already betting high on the oil industry. The fact remains that Machine learning can help in providing seismic segmentation to label geological structures important for oil exploration. The amount of data already collected by the Oil industry can be fed to train the machine (AI). In 2018, the oil and gas industries spent an estimated $1.75 billion on AI — a sum that is projected to balloon to $4 billion by 2025. The bottom line remains that the oil industry is optimistic about the R&D happening and the involvement of Big Tech into this sector. Any sort of breakthrough would mean significant production output and the prices are not going to storm beyond a particular upper bound. This reason may seem vague but if that’s so, let’s keep the other 4 points in mind to answer the question in the headline itself :p