A handout picture released by the UK Ministry of Defense shows British Royal Marines taking part in the seizure of an Iranian oil tanker, Grace 1, in the early hours of July 4 off the Gibraltar strait. Photo: Crown Copyright 2019 / AFP

For a very long time the diamond business was considered one of the bloodiest industries in the world. It caused various civil wars in Africa, murdered thousands if not millions of people, and left the Central African Republic in ruins. In order to stop the massacre or at least try to reduce it, the United Nations started the Kimberley Process (KP) that imposes extensive requirements on its members to enable them to certify shipments of rough diamonds as “conflict-free” and prevent conflict diamonds from entering the legitimate trade.

According to its official website, the KP has 54 participants, representing 81 countries, with the European Union and its member states counting as a single participant. KP members account for about 99.8% of the global production of rough diamonds. In 2012, the world celebrated 10 years of the existence of the organization, but the issue of blood diamonds was still prevalent. Seven years later, members of the World Diamond Council are still pushing for the pending conclusion of the KP’s review and reform process, and the related call regarding the strengthening of the scope of the Kimberley Process Certification Scheme (KPCS).

Now we are observing the creation of another bloody industry, this time related to energy sector. It is not a secret that where the big money is, more problems emerge.

To prove this theory, we just have to look at the Middle East. Since the beginning of the 21st century, there have been more than 20 conflicts. In 2013, Jeff D Colgan of the Harvard Kennedy School published a study in which he outlined that “oil is a leading cause of war”: Between one-quarter and one-half of interstate wars since 1973 have been linked to oil. It is important to say it out loud because otherwise we will not be able to avoid such wars in the future or craft intelligent foreign policy.

There are multiple ways the oil industry can enhance conflicts: competition over shipping lanes and pipelines, oil-related terrorism, and resource scarcity in consumer states are all potential sources of international conflict.

If we look at the current conflicts, we will see that there are two bands fighting for completely opposite objectives: on the one side we have a country that is trying to move global oil production away from traditional suppliers in the Middle East toward North America and new suppliers of conventional oil, such as Africa; on the other side we are observing how the Organization of the Petroleum Exporting Countries (OPEC) is trying to keep propping up oil prices.

In the first band, there is an effort to push oil prices down by considering easing sanctions on Iran and by increasing its crude-oil inventories.

For example, the American Petroleum Institute (API) reported an increase of 4.1 million barrels of crude-oil inventories for the week ending October 4, and the US Energy Information Administration (EIA) reported an increase of 2.9 million barrels. In this context, it shouldn’t be a surprise that the EIA is expecting lower crude-oil prices in the fourth quarter of 2019 and in 2020 despite tighter global balances. To be more precise, the EIA forecasts that Brent spot prices will average US$59 a barrel in the fourth quarter of 2019 and then fall to $57 by the second quarter of 2020.

Meanwhile, the second band is cutting supplies to push oil prices up. On Tuesday, OPEC secretary general Mohammad Barkindo said deeper output cuts were an option. He said OPEC would do what it could with allied producers to sustain oil-market stability beyond 2020. In conclusion, OPEC, Russia and other producers have agreed to cut oil output by 1.2 million barrels per day until March 2020. Military action in Syria also helped WTI crude oil prices to increase by more than 4,6% in just three days.

To summarize, the future of the energy industry and, in particular, oil prices depends not so much on supply and demand but on the winning party of the above-mentioned competing bands. The most interesting fact is that the US has more instruments to keep oil prices down. These include oil-production growth, sanctions against OPEC members, besides Venezuela and Iran, trade disputes, and shrinking demand for oil.

Curiously, the iShares MSCI Global Metals & Mining Producers ETF (PICK), which tracks the investment results of an index composed of global equities of companies primarily engaged in mining, extraction or production of diversified metals, excluding gold and silver, has a positive correlation with crude-oil prices, in this case Brent, and an inverse relationship with gold prices. 

Igor Kuchma

Igor Kuchma is a financial adviser who is passionate about economy and the capital markets in general. He has experience working with Russian, Spanish and American financial institutions. He helped to compile a course for the Series 7 exam, while some companies he has prepared investment portfolios and macro and microeconomic models in Excel, and has studied trends and historical data.

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