Oil: Pricing Geopolitical Risk

In this morning’s Early Look, we walked through a key component of our investment process which incorporates the concept “Prices Rule”. In effect, prices are often leading indicators, or just actual indicators, of fundamental events before they are more broadly known. The underlying assumption is that distribution of information is far from linear and generally someone will know about an event before the investment masses, which leads to prices often being an early predictor of future events.

Today’s price action in oil hammers home this simple point. As the price of oil rises, the cast of Geopolitical Risk characters from Putin to Chavez find a voice (see chart). This is the tradeoff in an global market of re-flating prices. This is not new, but needs to be both respected and understood.

According to the most recent information from EIA, Venezuela, Iran, and Russia produce roughly 2.4MM, 3.9MM, and 9.4MM barrels of oil per day. In total, this is equivalent to almost 18.7% of world oil production. In addition, since all three nations are oil exporting nations, unlike say the U.S. which produces a large amount of oil but not enough to export, they have the potential to disproportionately impact the balance of world oil supply and demand.

Prior to today’s powerful intraday recovery, the price of West Texas Intermediate was +23% in the last 4 weeks, which in hindsight seems to have been a leading indicator for some of the recent actions we’ve seen from Russia, Venezuela, and downing of an Iranian drone in Iraq. We remain long Oil via the USO etf. On this morning’s client Macro Morning Call, we outlined intermediate Trend line support for the price of oil at $44.30/barrel.


Keith R. McCullough
CEO & Chief Investment Officer

Daryl G. Jones
Managing Director