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Ecuador turmoil delights oil speculators

October 2, 2010

The following analysis is reprinted with permission from RIA Novosti, Moscow.

Ecuador turmoil delights oil speculators
©  RIA Novosti
By Vlad Grinkevich
October 1, 2010

Even the slightest political moves made by OPEC countries don’t usually go unnoticed on the world’s fuel markets. It’s no wonder, then, that the recent police revolt in Ecuador sent global oil prices soaring. Light Sweet Crude Oil futures for November on the New York Mercantile Exchange (NYMEO) jumped to $79.97 per barrel in response, while on London’s ICE, the price of Brent Crude Oil hit $82.31.

Analysts cannot rule out the possibility of a protracted political crisis in this oil-rich Latin American country. Should we expect more price spikes in the months ahead?

The latest developments in Ecuador can hardly be called extraordinary. The entire Latin American continent suffered from chronic political instability throughout the 20th century, and revolutionary outbursts there alternated with periods of calm or at least relative calm, when rebel movements braced themselves for future fighting.

Observers in the Soviet Union often described the Latin America of the 1970-1980s as a “continent ablaze.” Indeed, revolutions and counterrevolutions followed one after the other there in those years, and governments had to wage an incessant war against multiple rebel groups. In recent years, passions have subsided somewhat. But, obviously, this latest period of calm could not last forever, as even the most heavy-handed of Latin American dictatorships have so far been unable to completely paralyze the rebel movement in their respective countries.

Speaking of OPEC as a whole, most of the member countries, except perhaps Arab oil monarchies, are in the risk group. Some, like Ecuador or Venezuela, suffer from political instability; others, such as Iran, are in conflict with half the international community; still others are plagued by never-ending civil wars. Nigerian rebel groups, for example, continuously attack oil pipelines run by transnational corporations, reducing the oil the country supplies to foreign commodity markets.

Surprisingly, all those revolutions, coups and civil wars appear unable to derail oil traders. The global fuel market has learned to live with all kinds of political upheavals. It merely factors them into the prices.

So it would be naive to suppose that the recent uprising of military and police units in Ecuador over the pay cuts imposed by the leftist government could spark any serious fluctuations in supply and demand on hydrocarbon markets. However, it would be equally naive to expect market players, who have long been using oil futures as a speculative instrument, not to take advantage of the Ecuadorean unrest and drive oil prices up. Such speculative spikes accompany all the strong statements by the outspoken Venezuelan leader Hugo Chavez, particularly brazen attacks by Iraqi insurgents, and the latest twists and turns in Iran’s relations with the international community.

This time, however, it was not just Ecuador’s political crisis that made the oil markets go bullish. The crude price spikes were also a response to recent positive trends on the U.S. labor market. The United States is the world’s No. 1 consumer of fossil fuels, and any signs of economic recovery there are carefully monitored by oil traders around the globe. This monitoring has become all the more important now, amid increasingly gloomy forecasts from economics gurus. For example, Nouriel Roubini, a professor at New York University’s Stern School of Business, said the other day that the U.S. and the world economies face terrible prospects, and they are powerless to ward off a new recession.


Vlad Grinkevich is RIA Novosti’s economic commentator. The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti.

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