Oil In A Week (Crisis of Money Markets Reduces Oil Prices)

In the last several weeks, the drop of around 7-10% in international money market indicators in the last three weeks, due to the mortgage crisis in the US, has led to a roughly equivalent fall in oil prices. The price of Brent North Sea oil has hovered between $70-78 a barrel, and fell for a time to $68. This reduction is considered quite limited in comparison with previous experiences, when the price of crude oil fell to low levels due to international economic factors.

What is the relationship between money markets and crude oil prices?
The price of oil has fallen because investors and speculators have pulled money out of the oil market, due to the need for financial liquidity to cover losses in money markets. The wave of falling prices was likely to have continued, were it not for the beginning of the storm season in the western Atlantic and the spread of storms to the Gulf of Mexico and the southern coast of the US. This is where many sea and land oil fields are located, along with the most important ports for importing oil to the US. American weather observatories are expecting that Erin and Dean mark the beginning of a series of storms expected over the coming weeks. We have actually begun to see some companies begin closing their sea platforms and halting production from the Gulf of Mexico, as the firms move their workers and engineers to safe areas on dry land. For example, Shell has done this, halting the production of 50 million cubic meters of gas in the Gulf of Mexico; it evacuated some of its employees from sea platforms that are located in the path of the two storms. These developments have warned investors and speculators that the price of oil could rise once again, soon, especially because prices have yet to be greatly affected by financial developments and fall to low levels.

A fire that broke out in an important refinery in the southern coast of the US, political and security news out of the Middle East, and news about the US’ intention to put Iran’s Revolutionary Guards on the list of terror organizations (meaning an escalation of the confrontation between the two countries, even if at the political and economic levels) all helped halt the slide in oil prices. This announcement about Iran, if it is implemented, will hinder the implementation of some important Iranian oil projects, while it will boost the type of danger of an expected confrontation between Washington and Tehran. Iran’s Revolutionary Guards own a number of companies and some of them invest in the oil sector. The Guards are partners with foreign firms in developing the gigantic South Pars gas field; any boycott of these companies will mean confrontations of a new kind.

Dar Al Hayat