Turkey downed a Russian fighter jet on Tuesday after it strayed into Turkish airspace on the edge of Syria. Though the bond and currency markets didn't have much initial reaction this event, there was a notable reaction in the oil markets starting on Tuesday when U.S. crude prices rose more than 2.5 percent, testing low $40 levels. Brent futures for January spiked 2.99 percent, up $1.34 to $46.17 per barrel, just off a two-week high of $46.50. U.S. WTI crude also hit a two-week high yesterday, hitting $43.46 before falling slightly to end the session.
As one of the world's largest oil producers, all eyes are on Russia, especially as the Organization of the Petroleum Exporting Countries (OPEC) is planning to announce a potential cut in Saudi Arabian oil production at its meeting next week. OPEC, of which Saudi Arabia is a member, has been resisting a reduction in oil production for over a year now, even with prices tumbling to less than half of what they were in July 2014.
Demand Rises
It's important to remember that the world continues to grow which means that the demand for oil continues to rise, so we still need about 1.5 million barrels of oil more per day per year, as compared to the past. With overproduction at its current levels, many analysts are expecting that a cut in production won't harm prices, at least not in the short run. What appears to be more worrisome, however, is the political tension in both the Middle East and Russia, the two largest hubs of oil production. The potential for ISIS to attack Russian or Saudi production hubs could send prices even higher, which makes watching the political theater not only a matter of physical security, but a matter of financial security as well.