20 year analysis shows an actual supply disruption could cause further climbs
The recent geo-political tension in the Middle East and Northern Africa has again highlighted the sensitivity of crude oil prices to supply threats, with WTI crude oil climbing close to $100 per barrel recently.
There is speculation as to how high it can go and so far analysts have capped the price rise to a maximum of $140-$150 a barrel. However Ben Le Brun, market analyst at CMC Markets, says it could react more aggressively if there is an actual supply disruption as opposed to a threatened disruption. At this stage OPEC has kept the world well supplied and does have the ability to pick up any slack but things could soon change as the region is responsible for supplying 36 percent of the world’s oil, Mr Le Brun says. He has conducted a 20 year analysis which shows it is not usual for oil prices to double during times of crisis: But traders should use caution if trying to profit as the price can swing about wildly and unpredictably in times of crisis.
- During the Yom Kippur War the price of crude oil went from $3.00 per barrel in 1972 to $12.00 by the end of 1974. The Yom Kippur War sparked an oil export embargo by several countries and resulted in a loss of 7 percent of the free world oil production. This oil embargo made prices extremely sensitive, increasing 400 percent in six months. In today’s terms that would be equivalent to the WTI oil price hitting $360 a barrel
- The Iranian revolution and the Iraq-Iran War again highlighted the rise in price caused by actual as opposed to threatened supply disruptions. Crude oil prices more than doubled, increasing from $14 in 1978 to $35 per barrel in 1981.
- The price of oil again spiked in 1990 when the onset of the Gulf War and its proximity to the world’s largest producer, Saudi Arabia, put oil production in jeopardy. The price went from $21 in July 1990 to $46 by mid October. This spike was much less than some had anticipated but the price did double with fears.
- After September 11 2001 and the outbreak of the Afghanistan war the price of oil was initially sold off. It was not until the start of the Iraq War II in 2003 that OPEC had to ramp up production of oil to keep the supply chain going. Prices actually went down at the outset of the Iraq war with most traders predicting a swift end to the conflict but by late 2003 the oil price began to rise as insurgent activity began to affect the oil supply. Prices hovered around $30 when OPEC cut production and in 2004 hit $40 a barrel. OPEC subsequently raised production but terrorists targeted oil supply and later in the year oil touched $50.