A game of poker

Spearhead Analysis – 26.06.2015

By Enum Naseer
Senior Research Analyst,
Spearhead Research

pokerThe oil market is beginning to resemble a game of poker. As all players hold their cards close to their chests, it has become increasingly difficult to predict how the game ends. Analysts who had nearly half a decade ago asserted that the age of the Saudis would soon be over as peak oil approached have been proven wrong. The US still very much in the picture focusing on bringing great efficiency and innovation into the extraction process having become the biggest oil producer of 2014 despite the efforts of the OPEC to bully it out of the oil business, Iran is being talked of as a ‘wild card’ in the market and Russia has just surpassed KSA as the largest oil supplier to growth-obsessed China.

There is a great level of uncertainty in the oil market owing primarily to the fact that prices—based on demand and supply of oil, depend on various things ranging from geopolitics to growth and industrialization. While the U.S., Saudi Arabia and Russia, the biggest oil producers in the world are competing against each other for the largest market share ensuring abundant international oil supply, global demand has been relatively flat in the run up to 2015. “Demand strength will be one of the three key elements of the rebalancing act of the oil market, along with the flattening of the U.S. oil production and a decline in the production outside of OPEC and North America,” opines Pascal Menges, manager of Lombard Odier Global Energy Fund. It is important to add though that the first quarter of the current year demand has shown signs of improvement with Brent prices rebounding from lows of less than $47 a barrel in January.

It is a widely held belief that the “entire energy dynamic” has changed now. Instability in the Middle East has always pushed oil prices higher however, this time around despite conflict in the region, prices have spiraled downwards due to OPEC’s increased supplies, led by Saudi Arabia, in response to the shale oil boom in the US. Then there is Iran, another potential game changer. In the event that a nuclear deal is successfully struck between the oil-producing country and the US and sanctions are lifted, the former will experience an economic boom resulting from a dramatic increase in exports. Prices could decrease further as a result of increased supplies. Alternatively, with its control over two of the three oil chokepoints, it could give the Saudi camp a tough time by limiting access and keeping the price of oil high. While Russia and Iran would benefit from such an arrangement, the West would be worse off.

Conflict and instability in the Middle East especially post the rise of the ISIS, has upped the ante for the US to pursue energy security more aggressively.  The future of the oil market seems to be volatile and doubtful for the time being. At the moment, oil predictions are marked with great uncertainty: players have their game faces on, leaving observers to indulge in speculative thinking as multiple scenarios are drawn up picking various subliminal cues.

“All serious poker players try to minimize their ‘tells’, obviously. There are a couple ways to go about this. One is the robotic approach: where your face becomes a mask and your voice a monotone, at least while the hand is being played. . . . The other is the manic method, where you affect a whole bunch of tics, twitches, and expressions, and mix them up with a river of insane babble. The idea is to overwhelm your opponents with clues, so they can’t sort out what’s going on.” From the looks of it, all seems to be going by the book.