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Arguably, the instability in the Middle East has escalated to an almost unprecedented level. The violence, displacement of people and destruction of local infrastructure has all happened, with oil prices falling significantly over the same period. Over historic periods of similar instability, oil prices have increased due to a “lack of supply” issue. Indeed, the oil embargo of 1973 led to the creation of the US Strategic Oil Reserve (a reserve that in fact keeps all US military vehicles running for at least 6 months). The energy revolution in the US with shale fracking has almost completely changed their energy import requirements in fewer than 5 years. This key driver means that we now have an oversupply of oil. In addition, Iran is now able to legally sell oil for the first time in over 10 years on international markets, so there is now the issue of finding adequate storage facilities for the excess supply. Price trade wise – I expect a mild El Nino to be the initial catalyst for a break below $35, with then an increased possibility of a disorderly market as leverage players and commodity hedge funds exit long positioning; with the final push for $20.

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