Buckle up: Oil is going for a bumpy ride in 2017

Today, OPEC released its first data report  of the new year, which is also its first since its declared production cut began on Jan. 1.  

The OPEC report forecasts an uptick in the global demand for oil, based on a projection of global economic growth of 3.2 percent in 2017.

{mosads}The OPEC report anticipates that global daily consumption of oil will rise to 95.6 million barrels a day. 

The report also reflects a disturbing trend — the portion of Middle East-based oil in the global supply is growing, renewing an old energy security challenge.

OPEC Secretary General Mohammed Barkindo declared Monday in Venezuela that OPEC envisions that stability will return to the global oil market in 2017.

However, several factors indicate that the global oil price is set for a bumpy ride in 2017 and much volatility should be anticipated.

The first factor affecting oil price volatility is the size of the gap between global supply and demand for oil.

When supply and demand are far apart and the market is very liquid, minor shifts in supply and demand tend to cause only small ripples in the price.

However, when the oil market tightens and supply and demand are closer, small changes in the physical supply or demand for oil create big swings in the oil price.

Consequently, in a tight oil market, local geopolitical events have global impact.

Under current market conditions, events such as instability in Nigeria that leads to the closing of a drilling platform, a terrorist attack on an oil port in Libya, or an explosion on a supply pipeline, impacts the global oil price.

In the last two years, the state of the market mitigated the impact of events of this type, but this is set to change. 

Next, developments in the Middle East in 2017 will affect production for a number of Middle East producers.

Most likely, the incoming U.S. administration, along with its allies in the region, will launch a major assault on ISIS-controlled areas in Syria and Iraq, leading to the flight of many fighters to North Africa, where ISIS has a growing presence.

There, they will focus on global terrorist attacks and assaults on the energy infrastructure in Libya and Algeria. Both countries have already witnessed several major ISIS attacks on their oil and gas production sites and infrastructure.

Under current market conditions, knocking out even part of Algeria and Libya’s oil production would send prices climbing. Attacks, especially in Algeria, could also hamper vital natural gas supplies to Europe.

Another factor affecting the volatility of the global oil price is the anticipated volatility in the world’s major currencies, especially the U.S. dollar.  

Since oil is traded in dollars, changes in its value affect the price of oil, regardless of changes in the oil market.

This year has already started with major fluctuations in the dollar, as well as the British pound and euro.

With the entrance of a new U.S. administration and new economic policies, continued volatility in the dollar is anticipated, leading to a topsy-turvy oil price. 

The last two years marked the biggest drops in investment in new oil production since data has been recorded.

In addition, as Executive Director of the International Energy Agency Dr. Faith Birol pointed out, the decline in production in more expensive producing regions has led to the return of cheaper Middle East production as the global leader.

This is reflected in the OPEC data. Oil produced in the Middle East now accounts for 35 percent of global oil production, the highest in over 40 years.

This recreates an energy security challenge that seemed to belong to the past. 

Brenda Shaffer is a professor at Georgetown University’s Center for Eurasian, Russian and Eastern European Studies. She is the author of several books exploring geopolitical issues, including “Energy Politics”. 

The views expressed by contributors are their own and not the views of The Hill.