October 16, 2023
Examining the Oil: A Look into the Future

Quote: “The ongoing geopolitical tensions could potentially disrupt established global supply chains, leading to trade wars, new sanctions, and more. It’s hard to fathom the repercussions if Persian Gulf nations cease oil and gas exports to Europe and the USA.” – Andrey Syrchin, CEO of Cresco Capital

Greetings. I continue to share insights to help everyone understand the current financial dynamics at a domestic level and what might transpire in the near future. I turn my attention to oil – a cornerstone for many processes.

The attached graph illustrates a 23-year trajectory of oil prices, beyond which the monetary values and inflation rates were significantly different, rendering a further analysis less relevant. Currently, the oil price stands at a moderate level, neither too high nor too low, relative to the average.

Recent developments in the Middle East have prompted a thorough contemplation of oil quotations. The cause of concern primarily revolves around the following aspects:

  1. Oil permeates every aspect of daily consumption—be it a flowerpot, the bread one consumes, a cucumber, or the wooden table before you, a significant portion of their composition is attributable to oil.
  2. Inflation and consumer expenditure are intricately linked, given the indispensable role of energy and oil products in logistics.
  3. A myriad of oil-producing nations, including the USA, Saudi Arabia, Russia, Iran, Iraq, and Norway, have their economies closely intertwined with oil.
  4. Countries with energy-intensive economies, such as China, India, Turkey, Germany, France, and Japan, often face hardships when oil prices reach extreme levels.

The unfolding warfare threatens to dismantle established supply chains globally, potentially leading to embargoes, trade wars, new sanctions, among other repercussions. The oil market bore the brunt during the pandemic, and a contrary scenario could unfold now. The ramifications could be dire if Persian Gulf nations halt oil and gas exports to Europe and the USA. Escalating tensions could trigger an uncontrollable surge in oil prices, with speculation reaching its zenith, potentially pushing prices to the 150-200 range—a scenario not unfamiliar in history, albeit the inflation dynamics have altered since.

Projected Outcomes:

  1. A sudden dip in global GDP, plunging major economies like the USA, China, and Europe into a severe recession, with the USA possibly curtailing exports to meet domestic demand.
  2. Inflation is likely to linger for several years ahead.
  3. Monetary expansion could intensify, yet lowering interest rates may not be feasible, lest hyperinflation ensues in western nations.
  4. Initially, oil-producing countries might experience a short-term positive impact, followed by a downturn. In this scenario, the ruble could potentially depreciate to 70-80, for instance.

In conclusion, our current position appears to be on a significant fault line, making future trajectories uncertain. The heightened provocation from Iran, if escalated into a direct confrontation, could induce volatility in the markets, affecting currencies and commodity markets alike. However, it’s noteworthy that markets seldom plummet during military conflicts; on the contrary, they often thrive. So, for those anticipating a doomsday scenario, rest assured, the outcomes are generally predictable. The likelihood of oil prices hitting 100 this year is high, a prediction nearly realized earlier, but upcoming events might provide the necessary impetus.

Wishing everyone a good week!