The world is currently trailing four million barrels per day (bpd) in terms of oil supply disruptions, and with 2.4 million bpd in untested spare capacity, Saudi Arabia may not be able to accommodate the loss of Southern Iraq or another major conflict, a report said.

Fluctuations in global oil output have fallen to historic lows, added the latest Bank of America Merrill Lynch Global Energy Weekly.

A drop in global oil production swings to historic lows has been a key dampener of oil price volatility, the report said.

Yet, even if a faster Saudi reaction time has helped smooth global production, country-level oil output swings have turned wilder. History suggests that geopolitics and armed conflict are major drivers of global oil output fluctuations.

Geopolitical risk rising in recent years

From Arab Spring-related uprisings in Libya or Egypt, to a civil war in Syria and now violence in Iraq and the Ukraine, geopolitics is impacting oil. Geopolitical risk measured by combat deaths does not always correlate well with market volatility, the Global Energy Weekly said.

But wars and conflict are easy to spot on an oil price series. With combat deaths rising four fold in the last 10 years, oil markets should prepare for more turmoil, according to the research report.

America still takes up 38 per cent of global military spending, but appetite for foreign adventures is low. As an example, a drop in US combat deaths in recent years has been mirrored by a rise elsewhere.

The US plays a key role to secure trade and energy supply for the world. Inevitably, as the superpower retrenches, other regional and local powers will come to fill the void.

Russia’s attempt to exert influence on Eastern Europe or ISIS run on Syria and Iraq are recent examples. Following a drop to multi-decade lows, implied volume in long dated oil options at 15 per cent looks cheap. Oil after US hegemony may not be as steady, the report indicated. – TradeArabia News Service