Iran and the Myth of Geopolitical Risk in Oil

Iran is one of the linchpins of any geopolitical risk scenario by any definition. Iran is the second largest supplier of oil from OPEC nations. It also borders Persian Gulf, the Strait of Hormuz, and the Gulf of Oman. We have an estimate of 40% as the total percentage of daily oil shipments are tied to the Strait of Hormuz. Yet, here we sit with oil trading down over $2.00 per barrel and challenging the $70.00 per barrel level to the downside. When you see what happens in emerging and developing nations where there are questionable elections, the laws of petropolitics are rather easy to see. But when you see oil trading lower on the news, it does beg a serious question: Just how much geopolitical risk is really supporting the price of oil?
The $140+ super-spike prices of mid-2008 has been tied to major money flows of investors and a trade against the weakening US dollar. It also showed that the ability of traders to chase up the price of commodity can create more reaction that the actual market fundamentals. The imbalances of supply versus demand never justified those prices and the major oil giants never believed in the prices being that high as sustainable. Now, $70.00 oil still seems cheap, but when there is a sell-off of this magnitude in one day on the first day after a questionable election in Iran it brings up the question of just how much the price of oil is dictated by money flows and currencies rather than the actuality of geopolitical risk.

It seems that it may be easier to sell the fears and the worries of geopolitical risks than it is to show day in and day out that the price of major commodities ever fully reflect the uncertainties in the world.

Does this mean that there is no geopolitical risk? Absolutely not. Does this mean Iran is not relevant in calculating oil prices? Absolutely not. Any real standoff in the region that involves in Iran would likely drive prices higher. But there is still just this nagging question of how much faith you can place in the reality of geopolitical risks compared to the herd mentality and the fears in geopolitical risks.

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