The politics of global oil markets: what will happen next?

Oil markets have seen enormous volatility over the past few months, hitting highs of $147/b before dramatically correcting to around the $50-60/b mark. Political factors and speculation undoubtedly drove the market up, but the bigger question now, is how low OPEC will allow the market to fall as demand slackens.

Report Highlights
While OPEC was largely a gleeful spectator of the oil markets up to July 2008 when prices hit a staggering $147/b, it has resumed centre stage in the oil markets once more as prices plummeted to $55/b.

Geopolitical friction was undoubtedly used to drive prices up, just as readily as investors ignored political risk when dragging prices back down, but geopolitics now matters more than ever for the oil markets.

Politics matters again to the oil markets, but not in the sense of how far it will drive the price up, but more at what price a floor will be set as a global downturn sets in. Slackening oil prices are more likely to exacerbate resource nationalism and production cuts, rather than a fundamental change of political direction in producer states.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
OPEC has been a happy recipient of high receipts but will need to start putting a floor under the market once more 2
Yet the Bull market used geopolitical friction to drive oil prices up 2
Speculation was also a major factor dictating super-peaking markets 3
The market has effectively shown inverse responses to classic price signals 3
Speculation has also had long term implications in terms of shifting political balances of power 4
A number of OPEC states have used large oil receipts for political gain 4
Enormous market volatility has had prompted considerable concern among OPEC ranks 5
As oil markets correct OPEC cuts have failed to stem the decline exposing producer states to economic instability and political friction 5
Iran remains particularly exposed to falling oil prices 6
Most OPEC states can't afford to let prices fall to maintain stability, a factor which is also drawing Russia closer to the cartel as a key non-OPEC player 6
Russia will not join OPEC due to strategic considerations with Saudi Arabia 7
Bilateral Russian relations with OPEC members will present difficulties for Saudi Arabia 7
Power shifts within the cartel have also occurred, but Saudi Arabia remains at the epicenter of global oil supply 8
Overall producer states will look to cut production to safeguard regimes rather than engage in serious political reform 9
Political risk will make the necessary long term investment in oil difficult to meet demand 9
Supply-demand remains tight but will get tighter as we reach a 'geopolitical peak 10
Ultimately political risk will start to matter once more to oil markets, not in how high the price goes but for the short to medium term in setting the floor 10
APPENDIX 11
Methodology 11
Ask the analyst 11
Datamonitor consulting 11
Disclaimer 11
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Figure 1: A tale of two markets: bulls and bears 3
Figure 2: Oil market volatility has been enormous of late 5
Figure 3: Supply-demand fundamentals will remain tight 10
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