Forex Market News

OIL: between Russia and Saudi Arabia – FBS

Five-dollar steps

It’s always curious to see psychology visualized. WTI oil price performance on the daily chart below shows pretty clearly how “round numbers” work in the market.

Since May last year, the price has been mostly contained between $50 and $60 per barrel. The last tip of the chart oversees the price movement down below thanks to the US-Iran escalation over the killing of the Iranian General Soleimani in Iraq. The ensuing three-day standoff with harmful (literally) missile retaliation from Iran created that tip through a $5-increment from $60 up to $65. Then the virus came, and the price dropped.

We have to note, though, that the downward reversal is not a direct consequence of the virus outbreak. The price bounced downwards because it was overheated already on the US-Iran conflict. Hence, many observers took it as a duly correction when it went from $65 back to $60 and then to $55.

Therefore, while the virus stroke the global community and started expansion, oil did not show any direct response as it was already in the downturn. That’s why there was not much discussion about it in January. But in February it descended from $55 to $50 per barrel, and that’s where the market started worrying. Specifically, OPEC. They were even thinking to move forward the emergency meeting to February but a temporary upward correction should have cooled them down a bit so they kept March 5 as the meeting date. Still urgent, though.

Why is that a problem?

Very easy – profits. On the map below, dark grey represents countries that sustain themselves mostly on oil-related exports. OPEC cartel, except Russia and a few other countries, consists of those countries. And now, they see the only source of their income costing less than $50 per barrel – that’s a breakeven price level for most of them.

Source: CIA

That means they are looking at the face of a zero profit. To a lot of them, plus-minus several months of a situation like that means a difference between relatively stable state integrity and an outright revolution and disintegration. That’s why there is much more than just money at stake here. It is geopolitics. And there are numerous political and economic entities that directly benefit from this disaster. OPEC is definitely not one of them.

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