Geopolitics Succeeds OPEC as Main Driver of Crude Prices as WTI Hits 3-Year High

Talk of Middle East conflicts has overshadowed bearish EIA data. File Image / Pixabay

Wednesday's crude market performance supported the theory of many analysts that geopolitics now seems to be the main driver of oil prices: US oil surged once again, by 2 percent, solely on the strength of U.S. president Donald Trump declaring that missiles "will be coming" to Syria in retaliation for a suspected chemical attack on the rebel-held city of Douma by forces loyal to Syrian president Bashar Assad.

West Texas Intermediate settled up $1.31, or 2 percent, at $66.70, its best showing since December of 2014, while Brent crude climbed by 96 cents to $72 per barrel.

Further price hikes could result in coming days due to Saudi Arabia, which on Wednesday intercepted at least three ballistic missiles fired at Saudi cities by Yemen's Iran-aligned Houthis, who claimed to have targeted the defense ministry in Riyadh and a Saudi Aramco distribution facility in Najran.

The geopolitical tensions overshadowed a report by the Energy Information Agency that commercial crude inventories in the U.S. rose by 3.3 million barrels in the week through April 6, in sharp contrast to a Reuters survey that had  anticipated a 189,000 barrel decline.

Matt Smith, director of commodity research at ClipperData, called the EIA's findings "a fairly bearish number just from the perspective that we did see a pop in imports last week."

He added, "All eyes are on geopolitical tension at the moment, not just because the market is that much more finely balanced, but because there are several pockets of geopolitical tensions."

Indeed, the recent behaviour of crude traders compelled Bloomberg to remark that geopolitical tensions have replaced the Organization of the Petroleum Exporting Countries (OPEC) crude production cuts as the key driving force of the oil market.

Adding insult to injury, the news agency went on to state that "Beyond the immediate threat of conflict in the Middle East, there are broader signs that OPEC is losing influence over oil prices due to geopolitical events beyond its control: the economic crisis in Venezuela and the re-imposition of U.S. sanctions on Iran could involuntarily double the size of the group's agreed cuts by year-end, with further potential to send prices spiraling higher."

But even though rising prices is precisely what many OPEC members want in order to bolster their ailing economies, the consequences of these prices are not pleasing Sinopec of China, Asia's largest refiner, which plans to cut Saudi oil imports loading in May by 40 percent in response to Saudi Aramco setting higher-than-expected prices.

Also, trading sources at two North Asian refineries told Reuters they each plan to reduce May orders from Saudi Arabia by 10 percent.

Earlier this week, the Saudis stated they are seeking $80 Brent in the near term in order to achieve a better valuation of Saudi Aramco in preparation for its initial public offering, tentatively scheduled for sometime in 2019.