How The Paris Attacks Could Change The Oil Debate

Seasoned commodities investors know that geopolitical events often have profound impacts on oil prices. History is littered with examples of conflicts in major oil-producing countries prompting supply disruptions, which in turn stoke higher prices for oil futures and exchange traded products such as the United States Brent Oil Fund, LP (NYSE:BNO).

Paris, Syria And West Texas

In the wake of last week's terror attacks in Paris, and France's subsequent bombing of Islamic State strongholds in Syria, oil prices have slipped with West Texas intermediate futures falling below $40 (at this writing) per barrel for the first time since August.

Not A Unique Situation

As a notable example, in the early part of 2014, conflicts in Libya and Iraq led to temporary outages in their oil production, keeping world prices high, even as supply elsewhere in the world continued to ramp up. When production from those two countries came back on stream, that was an important trigger for the plunge in oil prices later in the year, said S&P Dow Jones Indices Global Head of Commodities Jodie Gunzberg in a recent note.

Actions, Moves Seen In November

Over the past two weeks, BNO and the United States Oil Fund LP (ETF) (NYSE:USO), which tracks front-month West Texas intermediate futures, are each down nearly 15 percent.

Oil has a reputation for volatility, and history shows that volatility increases during periods of armed conflict in regions of significant oil production.

While the S&P GSCI Crude Oil only is recorded since 1987, below is a chart that goes back to 1947 by WTRG Economics that shows spikes in oil price jumped more than two times on average during critical periods of conflict, including the Iran/Iraq War, Iranian Revolution, Yom Kippur War and Oil Embargo, added Gunzberg.

S&P GSCI Oil can be tracked by the iPath S&P GSCI Crude Oil Total Return (NYSE:OIL), an exchange traded note that follows the S&P GSCI Crude Oil Total Return Index. That ETN is off nearly 14 percent over the past two weeks.

OPEC

There is some speculation that following the attacks in Paris, the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, could shift its view on market share. To this point, OPEC has been loath to trim production, even as oil prices skid, because the cartel has been looking to consolidate its grip on global oil market share.

That policy has been a burden not only for ETFs such as BNO and USO, but volatile exploration and production equities as well.

The ISIS attack on Paris might be the catalyst to change OPECs oil market policy of defending market share. Saudi Arabia may need to alter their focus to support defensive measures rather than maintaining oil market share. There is a pivotal question about whether Saudi protects the long-term value of oil reserves or if they defend their role as the pre-eminent Sunni power in the region... both are important, added Gunzberg.

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