Are Geopolitical Risks Enough to Boost the Price of Oil?

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By Jacob Maslow

Oil pumpsThe recent uptick in the price of oil has been explained in one of two ways. The first way is quite predictable. Many analysts are pointing to the sagging fortunes of the US dollar as the culprit behind the uptick in the price of oil. As you already know, the dollar and price of commodities often move in opposite directions. This is not always the case but, by and large, they move in opposite directions. When the US dollar appreciates, the price of oil tends to go down.

The other school of thought regarding the recent uptick in the price of oil is that the geopolitical drama playing out in Yemen, the country bordering Saudi Arabia, is the cause. I have a tough time believing this. If this is the case, then the drama playing out in Libya and elsewhere are sure to pump up the price of oil. They haven’t. There is a short uptick but, eventually, the price gets beaten back down.

As I have mentioned earlier, the price of oil tends to get stuck within a certain trading range for many years until something dramatic happens. It got stuck over $100 per barrel for a long long time. Now, it is looking like it will be stuck around the $50 range for quite some time. This is just how the market dynamics for this particular commodity play out. I don’t expect that to change anytime soon unless the global economy improves so dramatically that the demand would soak up the huge amount of supply available. Any talk about geopolitical risks impact supply. But since there is so much supply, any geopolitical risk, whether it is Iran, Yemen, or Saudi Arabia, isn’t going to do much unless the demand picture changes.

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