Market Insights

  • 7 Mar 2012
  • By CME Group
  • Topics: Energy

Oil Market Dynamics and the Fear Factor

Crude oil prices are surging due to fears of potential supply disruptions related to the rising global tensions surrounding Iran’s nuclear ambitions. This rise in crude oil prices has occurred despite increased supply from Saudi Arabia, more production in the US and Canada, less US imports, slower oil demand growth due to stagnation in Europe and decelerating growth in China, and competition from cheaper alternative sources of energy such as natural gas. That is, the purely economic supply/demand fundamentals of the oil market might suggest lower oil prices. The addition to the oil price equation of the geo-political dimension of fear trumps the economic fundamentals.

This is a current example of the challenges markets face in combining two distinctly different scenarios. One scenario has a very low, but all too real, probability of an outcome with dire consequences, while the other has a high probability, but by no means certain outcome of market stability and economic optimism.