Out of all the commodities, crude oil is typically the most intertwined with geopolitics and international relations. This is why it’s important for crude oil traders to consider the relationships between different countries as well as the overall stability and prosperity of producing and consuming areas. Any news coming out of these areas has the potential to disrupt the equilibrium between supply and demand and shift oil prices. 

The war between Iran and Iraq in the 1980s is one example of a time where supply and demand shifted due to international relations in a major oil-producing area, with supply decreasing as a result of the conflict. Internal conflict, such as unrest in Nigeria's oil-producing regions or the Libyan civil war, can have the same effect. Geopolitical disputes between major oil producers and consumers can also lower supplies. After Russia's invasion of Ukraine in 2022, the U.S. imposed sanctions on Russian oil which decreased supply and led to overall higher oil prices. 

Just as geopolitical difficulties can lift the oil price, any signs of improved relations can reduce the oil price. News of improvement involving a major oil-producing area could be taken as a bearish price signal since it would enable suppliers to increase oil production and exports. For example, news of a cease fire in Ukraine could likely move the markets significantly. 

Geopolitical relations in net oil-consuming areas are also important to consider, especially if they involve large buyers such as China, India, the U.S., and western Europe. An issue that affects demand in these countries could be a bearish price signal. For example, the lockdowns during the COVID-19 pandemic decreased the demand for oil in consuming countries, leading to a decrease in oil prices. 

A negative geopolitical environment is generally bad for the global economy. When economies are weak or in recession, oil consumption is often reduced. Tension between the United States and China is closely monitored since any disputes between these major crude oil consumers could negatively impact the health of the global economy and reduce overall demand. Elections in the United States are also closely watched to understand the elected candidate’s stance on renewable energy and fossil fuels. 

Since oil is the most political and interconnected of all the commodity markets, successful oil traders watch the news headlines closely to understand the relationships between both oil producers and consumers. 

If you’re interested in learning more about how catalysts like geopolitical risk impact the energy market, you can review this Excell with Options article.