Turmoil in the Middle East and Its Influence on the Energy Market
December 2, 2020
Written By Tim Danze
As I write this latest market commentary article in mid-January, we have just gone through some serious geopolitical events in the Middle East. On Jan. 3, the United States launched an attack near the Baghdad International Airport that killed Major General Qassem Soleimani, who was the commander of Iran’s secretive Quds Force. As this news became known, the overnight energy market saw crude oil jump up $5 per barrel. Fears of escalation and the potential for retaliation were rampant, and it didn’t take long before Iran struck back with a missile attack on two U.S. Air Force bases in Iran on Jan. 8. As news of Iran’s counterattack became known, the overnight energy market jumped 8 cents per gallon on ultra-low sulfur diesel and RBOB gasoline.
The Middle East is always a concern when it comes to the energy market. There is a long history of unrest and uncertainty in the region and that’s unlikely to change any time soon. When the news of the attack and retaliation in the Middle East hit, it was no surprise the market rallied. The interesting thing is how the energy market quickly moved past this news and sold off.
The market has been moving lower and correcting a large portion of the last month-and-a-half’s rally. In the case of gasoline prices, we saw it hit its highest price since Aug. 1 and its December low all in a day’s worth of trading on Jan. 8. That’s just the latest reminder that commodity markets are volatile and are susceptible to being moved by the news.
Just a few years ago, these types of events would have been enough to push West Texas Intermediate crude oil to near $100 per barrel. So, why did we see such a quick correction?
“Market participants appear to fret less about supply disruptions in the Middle East, or at least the risk of disruptions, thanks to the impressive growth we have seen in U.S. output over recent years,” Bank ING said in a recent note on its commodities blog.
The boom in U.S. shale oil drilling and the United States’ weakening dependence on foreign oil has dulled the impact of Middle Eastern crises on the cost of energy. As the United States has become the world’s top oil producer, people’s perceptions of the energy markets have changed. To be sure, trouble in the Middle East still raises concerns, but the market is better equipped to weather disruptions, especially with OPEC’s spare oil capacity in the range of 3 million barrels per day.
While shale oil production has created some slack in the global oil market, we have no certainty of how long that will remain true. I know I may come across like a broken record on this topic, but I believe this latest round of geopolitical events is further confirmation of the value of fuel contracting. It’s one of the most effective ways to control your fuel costs. Fixed price contracts can help you lock in a price as a strategy to level out the highs and lows of the energy market. It’s incredibly hard to time the market and buy the lows. Instead, what you should aim to do is lock in a fair price for the year, your season or your key months of fuel usage.
History shows us that winter usually offers good value in fuel pricing and you would save money in most years if you contract during that timeframe. However, that doesn’t mean you’ve missed your chance at a good price for contracting purposes. Any pullback in the market in late February to March could be a prime opportunity to initiate a fixed price contract. We have no way of foreseeing where prices will go from here or if world events will drastically alter the supply situation, so it may be worth looking at contracting options to protect yourself against the unknown.