Oil Slips from 7-year High Ahead of US-Iran Talks

Oil has been volatile in the last few days with a strong upward bias. Just a couple of days back, oil had scaled to an all-time high of $95/bbl in the Brent Crude market. However, after touching a 7-year high, the price of Brent has scaled back to the $90/bbl levels. That offers some solace. However, the big question is whether this fall in oil prices is a reliable trend or whether it is just a blip before it resumes its upward journey to $100/bbl.

The one factor that has pulled down oil prices is that some of the geopolitical risks have been neutralized. For instance, in the last few weeks, the biggest risk for the oil markets were the uncertainty caused by the Houthi rebels in the Middle East and the likely attack on Ukraine. Russia walking into Ukraine was a much bigger risk as it would disrupt the supply lines of oil and gas from Russia into Europe. That had pulled up oil and gas prices sharply.

Check - Brent Crude Crosses $90/bbl for 1st Time in 7 Years

However, in between, the development of a thaw in the cold relationships between the US and Iran came as a pleasant surprise for the markets. Both the US and Iran are likely to resume their nuclear talks and it is hoped that the final outcome would be the resumption of oil supplies from Iran. Many countries who cannot do business with Iran for fear of US sanctions, can go ahead and start trading relationships with Iran once again.

Of course, the situation in Ukraine is still extremely volatile. It is a major flashpoint since any aggressive action by Russia would invite individual level sanctions on Russia, apart from country level sanctions.

Russia wants NATO to stay out of the Ukraine circle of influence and till that is resolved, the situation remains very volatile in the region. That would ensure that oil gets to $100/bbl sooner rather than later.

Explaining the fall in Brent Crude from $95/bbl to $90/bbl, analysts are of the view that most of the risks are more than adequately priced into the current oil prices. Hence, any positive news flows, like the thawing of the cold relationships between the US and Iran, tends to have an oversized impact in pulling the oil prices down. That possibly explains why oil prices have corrected from higher levels.

One of the interesting aspects of oil has always been that it is an auto correcting mechanism. For instance, higher oil prices would invariably entice a lot of supply. The same OPEC which is increasing supply sparingly today, would flood the market at above $100/bbl. Even the US shale is likely to come back with a bang with a 40% rise in investments. Clearly, this auto mechanism works best in the long run for oil.