How Do Geopolitical Events Impact Diesel Fuel Prices in 2020?

Email Share on Linkedin

Under normal circumstances, geopolitical events would indicate upward price pressure for crude oil and transportation fuels, like gasoline and diesel. The COVID-19 pandemic, however, has dismantled both supply and demand to the point that the weight of geopolitics in the world energy market has taken on a new identity.

Prior to this year, you could turn on the television and see news about civil unrest or an attack somewhere overseas. Soon after, diesel price volatility would accelerate, and the cost of getting shippers’ goods to market would change. Sometimes the reason for this volatility was obvious. Other times, not so much. An international pandemic adds a completely new and unforeseen dynamic to the conversation.

Why Do Geopolitics Impact Diesel Prices?

Historically, the relationship between geopolitics and fuel prices is a sensitive one and, at its core, comes down to the basic principles of supply and demand. Sometimes the sheer threat of a disruption to the global oil market’s balance impacts prices, and other times, physical supply is the change agent. The market tends to react to said disturbances quite fluidly, leaving oil and diesel prices vulnerable.

For the supply chain industry, paying attention to how these events influence diesel prices is imperative, because transportation fuel spend makes up anywhere between 20 and 30 percent of the cost to move goods to market. When a new market event hits headlines, knowing how it will add to their spending will help them communicate with their organization and plan accordingly.

Now, COVID-19 has shaken the crude oil and diesel supply-demand picture like never before. The economy is in a deep recession due to consequences of COVID-19, placing severe downward pressure on energy prices given the resulting demand destruction. Meanwhile, the supply environment also took a turn because oil producers and refiners have taken it upon themselves to institute supply restraints that help restore balance in the market.

What has changed between 2019—when geopolitics was the main source of upward fuel price pressure—and 2020, when geopolitics seems like a non-factor? At the root of this change is a behavioral shift in geopolitical relationships previously perceived to only lead to higher prices at the pump. That, and a pandemic that holds responsibility for much of this upheaval.

How The Year 2020 Changed Oil Price Dynamics

The goal of the Organization of Petroleum Exporting Countries and its allies (OPEC+) is to keep oil market prices balanced. The path to achieving balance and the dispersion of responsibilities to make it possible, however, frequently makes for contentious conversations among OPEC+ participants. Saudi Arabia and Russia—two of the world’s three largest oil producers—often headline these disputes.

world map of countries that are members of OPEC highlighted in navy, and their allies highlighted in cyan

Downside Risk from OPEC+ Production Has Increased

When COVID-19 spread internationally and the demand-driven oil price crash followed, the OPEC+ cartel was motivated to lower production, offset the virus’s hit on consumer demand, and stabilize prices. Fast forward a couple of months and this was far from the case. Saudi Arabia and Russia could not agree on a production cut quota and decided to abandon cuts altogether and enter an oil price war in the quest for market share. Other, smaller OPEC+ members followed suit, ultimately bringing more supply onto the market than ever before at the same time that demand was falling faster than it ever had. Move ahead another couple of weeks and the group attempted to put its disagreements aside by aligning to a strategy that would chip away at the market’s unprecedented supply glut.

Nonetheless, tension still resides in the group even as they now work to collectively cut production and build price back into crude oil. A power struggle has emerged that leaves its fundamental objective a few phone calls away from being completely different. In other words, internal OPEC+ relationships have become more sensitive.

If nations fail to comply with their contribution to the group’s strategy, or if disagreements manifest to the point that actions drastically differ from those of key stakeholders, the cartel may become more competitive than collaborative. This competition likely means the fight for market share becomes even more of a possibility, encouraging more countries to open the taps and push prices downward.

It will be interesting to see how the current production-cutting measures taken by OPEC+ evolve over its existing planning horizon. Smaller oil-dependent nations’ satisfaction with the ongoing low-price environment—paired with the lack of need for barrels on the market—does not bode well for longer-term growth.

OPEC+ is just one example of how geopolitics has now become a bidirectional market driver. A similar example emerged throughout the course of the U.S.-China trade war and the like. This reinforces how geopolitics have shifted to more of a macro-level market driver, centered on cross-border relationships, with supply and demand considerations capable of making geopolitics a downside market risk.

COVID-19 Masks Geopolitical Risk, But it is Still Prevalent

Unstable relationships across OPEC+ nations and other major economies are undoubtedly responsible for the muted role of geopolitics in the 2020 energy market. The COVID-19 pandemic has proven so impactful on supply and demand that geopolitics have not had a chance to move the diesel price needle. That is not to say geopolitical events have been absent, nor should they be forgotten about, but it has proven that their influence has been significantly undermined.

For example, Libya’s civil war and the resulting oil sector impact have gone largely unnoticed. The OPEC member’s crude production has fallen over 1 million barrels per day to just over 0.1 million barrels per day. Additionally, a force majeure on exports has essentially removed Libya from the equation altogether, for the time being.

Similarly, Venezuela—once an oil industry powerhouse—now has just one operating oil rig, despite possessing the largest oil reserves in the world. Their contribution to the global supply landscape has also fallen off the radar as the nation deals with strict U.S. sanctions through an economic crisis. This exposes how the market has adapted to an environment in which geopolitical-related supply disruptions do not have the power they once did.

Again, these are just a few examples, but scenarios that would normally inject upward price pressure into crude oil and diesel have failed to do so. This is because of the pandemic, consequences of its existence, and the reality that it now takes a more large-scale event or conflict for geopolitics to truly earn the spotlight.

Why Should Shippers Pay Attention to Global Market Events? 

Across an entire supply chain, slight fluctuations in the price of fuel and other inputs will magnify at year-end. This makes it important for organizations to not only pay attention to but to understand how global market events will translate into their strategies.

In 2020, shippers should still monitor geopolitical news, even when the state of supply and demand in the oil market makes it less likely that these types of events will impact diesel prices. Breakthrough continues to report on geopolitics in the monthly Advisor publication and advise our clients on how it will impact their strategies because of the lingering risk they pose, even though they have taken on a new role in 2020. The impact of geopolitical events is not gone, it is simply evolving.

Take Control of Your Transportation Network.

Remove distorted transportation practices and reveal data-driven insights with FELIX.

Learn More

Read more on these topics:

Tags: ,