Energy market’s geopolitical mood shift

November 25, 2015 09:07 AM

Oil prices rallied yesterday on the changing perceptions of geopolitical risk and the complexity of the market. A few weeks ago the oil market might have viewed the shooting down of a Russian warplane from Turkey as bearish because of the impact it might have on lowering economic activity and travel confidence but instead the market focused on the growing risk to supply. That mood shift seems to suggest that the crude oil market may be changing. Instead of looking for reasons to sell-off, it now appears as though the market is looking for excuses to rally. Part of that mood shift may be technical after the failure of crude oil to close oil below $40 despite supply being at an 80-year high. It may be also be partly due to seasonal demand for oil that should start to rise as we come out of refinery maintenance and head into the winter demand period. Yet overnight European stocks moved higher and oil prices sold off as the market is now feeling a little less fearful that Turkey's shooting down of that Russian fighter jet will escalate into a wider conflict which shifted the mood once again.

Obviously with Russia and Turkey there is a huge energy component. Not only is Russia one of the world’s largest crude oil producers they also are a major supplier of natural gas to Turkey. One possibility is that Russia may try to play coy with Turkey’s natural gas purchases in retaliation for the downed warplane but that is not likely. Even though Russia used that tactic with Ukraine, Russia needs that natural gas revenue from Turkey very badly with oil prices as cheap as they are.

Speaking of the Ukraine, Russian oil company Gazprom, cut supplies to Ukraine until Kiev pays for more energy. Reuters is reporting that Russian Energy Minister Alexander Novak said Moscow would cut gas supplies to Ukraine on Tuesday or Wednesday because Kiev had not paid up front for more gas and might also halt coal supplies to Ukraine in retaliation for a power blackout of Crimea.

Pro-Ukrainian activists have so far prevented repairs to the damaged pylons and associated power lines. “Today or tomorrow gas deliveries will be stopped because of lack of advance payment," said Novak, saying Ukraine was in any case using very little Russian gas. Sky News reports that Gazprom said that by 7 am GMT on Wednesday Ukraine had received all the gas it had paid for and would not be sent more because the country had yet to pay in advance for future supplies. Chief executive Alexei Miller warned that the stoppage posed a serious risk to the secure transit of gas to Europe via Ukraine, as well as to Ukrainian consumers. Some 15% of the gas used in Europe travels through Ukraine.

In response to the announcement, Ukrainian Prime Minister Arseny Yatseniuk said his government would stop state energy firm Naftogaz from buying any more gas from Russia to reduce its energy dependence on Moscow.

We see the upside risks rising. Oil is at the bottom of a major cycle and the mood is starting to act less bearish. Look deep down the curve in oil and position for the coming era of higher prices.



About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.