Geopolitics And Oil: Still Connected

Geopolitics from a market perspective have been narrowly focusing on Isis and Ukraine. The effects are seen in the Rouble and Micex. I feel energy is not taken into account like it should be due to the direction of the move. Oil is declining as tensions are high between the west and Russia, which is counter to what market participants would expect. This reinforces the notion that the drop in oil is from an overabundance of supply and prices are dropping despite the tensions.

This does not discount the fact that oil prices are at play in the spectrum of geopolitical affairs at the moment. Looking at the current hot spots: Russian aggression in post soviet bloc nations, Iran increasing influence in the middle east, China asserting more power in the pacific and Japan becoming more militant. You can break these countries down into two groups, oil producers and consumers.

Much of Russia's budget is from oil revenue, and the price needs to be about $120 a barrel to balance the budget. Iran is in he same boat with the sanction imposed on it from the nuclear program. It is no suprise that these countries will try to exert more influence than give into western wants.

On the other end of the continent China is bolstered by lower oil prices, helping to keep the country near the projected growth rate. This helps to embolden the country as the resources that their growth requires are cheaper and more abundant.

The connection between these countries is with Russia and China signing more deals for oil and gas deliveries. With a cheap source of gas to China, they can feel more secure in their independence or oil imports while the deals could give Russia a sense of independence from the need to have European customers for its oil. Add in that Russia can veto sanction on Syria and Iran and you have a very unpleasant situation that is still affected by oil. While higher prices could see Russia try to increase is sphere of influence by economic means as opposed to military ones, this would put China and Japan into a position of weakness as major oil importers.

As of now the supply side story reigns supreme in the markets, but on the geopolitical front the price of oil is still a major factor adding uncertainty to Europe and Asia.