After 2013 ushered in one of the most placid years in oil markets in recent memory, 2014 has provided more than its fair share of surprises. A more volatile geopolitical landscape has been at the forefront, igniting prices beyond $US115 a barrel before a deteriorating growth outlook and rising supply combined to force crude below $US90 and hampered attempts to ignite inflation in key economies.
The oil bears are yelling from the rooftops after Brent crude hit a new four-year low overnight but, according to lauded political scientist Ian Bremmer, we are quickly approaching a floor.
Bremmer, who heads up political risk consultancy Eurasia Group and serves as lead global research professor at New York University, earlier this year trumpeted the prospect of sub-$US80 oil, largely on the expectation of an Iranian nuclear deal that would have led to the tapering of crippling Western sanctions.
Months on, his forecast of lower prices has been on the money, but growing uncertainty in the Middle East has him more cautious on the potential for sanctions to be eased.
“The prospect for a deal with Iran -- which was absolutely America’s top priority in the Middle East at the beginning of the year and there was a real belief that you could move in that direction -- has become considerably less likely,” he told Business Spectator in an interview on the sidelines of the World Business Forum in New York.
“The main reason for that is what has happened in Iraq and Syria around ISIS. That has become the top priority.”
Bremmer, a prominent and respected voice on geopolitical matters, argues that US missteps in the Middle East are greater than many realise, leaving talks with Iran over a nuclear deal on the backburner despite the fast-approaching November 24 deadline.
“US intel got [the ISIS rise] hugely wrong, it’s much worse than people think and the Americans are not co-operating with the Iranians one iota in that fight,” he explained.
“And that makes it much harder to get the Iranians over the goal line. The likelihood of getting this done was always about keeping it only focused on the nuclear issue and that’s become so much harder to do.”
The US-led oil sanctions were put in force at the end of 2011, cutting Iranian crude sales in half from their previous level around 2.5 million barrels a day, or about 3 per cent of global demand.
Iran’s crude trade was seen edging higher in the first half this year amid talk of less stringent sanctions and sanction-breaking activity, but Bremmer expects current sales of about 1.2 million barrels a day to be further curtailed in the near-term.
“By the end of this year and early next year, you’ll see more sanctions and oil prices will start creeping up again,” he asserted, adding a failed Iranian deal should represent a floor for Brent crude despite mixed demand and the US energy revolution “surprising on the upside”.
The one caveat is the potential for countries to ignore the US-controlled sanctions -- particularly, Russia, India, Brazil and South Korea -- though that is seen as more of a concern to Western multinationals that trade in those markets than to oil majors hoping for a price bounce.
While energy giants are often the key focus amid oil market speculation, it is the threat to inflation that sinking prices pose that is the most compelling storyline.
In America, monthly consumer prices fell for the first time in 18 months in August, leaving inflation at just 1.7 per cent year-on-year. Meanwhile, the latest reading from the Eurozone, which has been shielded somewhat by its weakening currency, found inflation at its lowest mark in five years, with prices rising just 0.3 per cent year-on-year in September.
The recent batch of soft inflation data can largely be credited to reduced energy costs, driven by oil prices that have sunk 25 per cent from highs reached in June.
The quick turnaround has cautious central bankers on the back foot, with the ECB now looking to ramp up its stimulus and the Federal Reserve dithering over just when the first rate hike will come.
The next set of inflation data -- due out in Europe on October 16 and the US on October 22 -- will do little to alter this landscape as oil prices have only lost ground since the last numbers were released.
However, if Bremmer is right, and oil prices are about to hit a floor, it could ensure the Fed’s first rates move comes around the middle of next year given recent labour market improvement. Europe, on the other hand, might -- just might -- be able to stave off deflation, at least in the near-term.