Price of oil drops despite global turmoil | Business| Economy and finance news from a German perspective | DW | 18.08.2014
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Price of oil drops despite global turmoil

Armed conflicts are raging in Russia, Iraq and other oil-producing countries. Intuition would lead one to expect the price of oil to spike over fears of supply disruptions, but the opposite is happening. DW examines why.

The price per barrel (159 liters) of European Brent crude oil sank to its lowest level in a year on Monday to just $101.37 (75.89 euros).

US crude is also cheaper than it has been for some time. In June, both varities cost $10 more than they do now.

For all the news about armed conflict in Ukraine, Iraq and Libya, the price of oil has proven itself largely immune to instability. Even as enormous oil tanks were set ablaze amid fighting between rival militias in the Libyan capital, Tripoli, the price of oil reacted only briefly.

Ample supply

"The somewhat substantial, temporary disruptions in Libya are very quickly compensated for through increased production in Saudi Arabia," said Klaus-Jürgen Gern, an economist at the Kiel Institute for the World Economy and an expert in global commodities markets.

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"At the same time, there is a trend of rising supply, particularly from the United States, where a boom in shale gas and oil exploration has made possible new production quantities," he added.

In the US, fracking has caused massive cracks in deep rock formations to tap oil and gas reserves that were previously inaccessible. In Europe, this drilling technique is highly controversial. In the US, it has triggered a spike in exploration.

Two companies in the US have even received the green light from Washington to begin exporting unprocessed oil - for the first time in four decades.

In its latest report, the International Energy Agency (IEA) came to the conclusion that the oil market was supplied "better than expected."

Weak demand

The large supply is up against a demand that has contracted in a "surprisingly strong" manner, according to the IEA. That slip is mainly due to the weak economy.

Oil refinery in Iraq

Supply disruptions in Iraq only had a short-term effect

The International Monetary Fund revised in late July its expectations for global economic growth from 3.7 to 3.4 percent, citing weak performances in the US and China and geopolitical risks in Ukraine and the Middle East.

Europe's economy is far from recovered. As the latest figures from the Eurostat statistics agency showed, the eurozone economy did not grow at all in the second quarter of this year. The German and Italian economies even shrank.

When the economies of industrialized nations and big emerging economies falter, demand for oil remains low too.

Relaxed markets

Given the strong supply and weak demand, the markets have been largely unaffected by news from conflict regions.

Advances of the militant group "Islamic State" (IS) in Iraq did raise concerns about production disruptions, and the price of oil jumped briefly, but once Washington declared it would bomb IS positions, that price fell again.

Even the conflict in Ukraine has not seemed to unnerve commodities traders.

"They mostly assume that the Russians have absolutely no interest in reducing deliveries, because they are so strongly dependent on revenues from the oil and gas business," said Gern from the Kiel Institute.

But expectations and situations can change at any moment, Gern added. Fluctuations could drive the price of oil skyward.

"The risk is definitely there," he said.