Oil Market Shrugs Off Middle East Turmoil

When fighters from the Islamic State captured Ramadi a town in Iraq earlier this week, which is only 80 miles from Baghdad the capital of the second largest producer of oil in the Middle East, the crude markets did little more than shrug their collective shoulders.

Instead of spikes that historically have accompanied the different geopolitical disturbances, prices of oil actually dropped that day.

Libya is close to becoming a failed state, while Saudi Arabia is battling with rebels in Yemen. Again, the oil markets seem to be indifferent.

The old adage that oil prices sharply respond to geopolitical problems no longer seems to be the case. It is a change reflecting a new global oil market where the increase of shale field in the U.S. and the determination of Saudi Arabia to defend its share of the world oil production ensures there is ample supply.

Politics are disrupting the oil supply more than is usual. Once Iran is factored into the mix, about 2.6 million barrels of oil per day are being kept from entering the market due to sanctions and conflict, five times the average between 2000 and 2010.

As government forces from Iraq attempted to halt the Islamic State’s advance, oil futures being traded in New York dropped 4% during Monday and Tuesday, to $57 per barrel and then rebounded the following two days.

While oil prices rallied over 10% during 2015, that is mainly because of strong demand, said oil analysts.

Even with the conflicts across much of the Middle East, the situation is not as dangerous as it might appear, said one oil analyst. He says the impact is overstated related to the conflict in Yemen.

Another, is most traders are still relaxed at the possibly nuclear deal with Iran. The EIA believes the agreement that eases Iran’s sanctions would knock up to $15 per barrel off the price of oil.

Some analysts however fell that the risk of shock is increasing because the world does not have much supply that is extra while global stockpiles remain ample, the oil markets is working with its thinnest cushion against a supply outage that has not happened in 7 years.

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