The terrorist attacks in Paris have made the United States and its allies realize they need to cut off the funding of Islamic State (IS) rather than focusing on military action.
The western coalition is targeting the militant group’s oil tanker trucks and rigs at the moment.
However, the overnight oil price slumped 2 percent Friday despite rising geopolitical risks.
It’s assumed that was part of the efforts to prevent IS from profiting off the oil fields it has captured.
IS is considered one of the best-funded terrorist organizations.
The majority of its revenue comes from oil.
It captured the oil fields in northern Iraq five years ago and has been selling oil to neighboring countries at a low price.
IS produces 30,000-40,000 barrels of oil per day, generating a daily revenue of US$2 million-US$4 million.
Oil contributes between US$730 million and US$1.46 billion to its coffers each year, and IS owns assets worth over US$2 billion.
IS manages its oil fields like a giant oil company, and it hired skilled engineers and traders, offering competitive salaries.
Traders usually buy oil at US$25-US$35 per barrel and then make a fat profit by reselling it at US$60-US$100 to oil refineries or other firms.
The oil industry has created jobs for the local population in Iraq and Syria, which are mired in wars and have a shortage of energy.
Ironically, Syrian rebel groups who are fighting against IS also depend on oil supplies from IS.
With massive oil revenues, IS is not after cash when it holds hostages for ransom.
The US-led coalition has changed its strategy after the Paris attacks killed more than 100 people.
US-led air strikes have hit more than 116 oil tanker trucks.
The coalition has made preparations in advance to ensure the oil price won’t go up because of supply disruptions from IS.
Oil price increases would benefit IS and Russia, the world’s largest oil producer.
In fact, low-cost producers in the US have already taken over control of oil prices from the Organization of the Petroleum Exporting Countries since the shale gas revolution.
That’s why the oil price posted a technical rally on the Monday after the Paris attacks and then dropped over 2 percent the next day amid expectations of ample oil stocks in the US.
Meanwhile, Russian deputy energy minister Alexei Teksler acknowledged that the oil supply glut may extend into next year and that supplies may not return to a state of balance until 2017 or 2018.
The price for West Texas Intermediate crude is expected to fall below US$40 per barrel again amid various negative factors, consultancy Energy Aspects said.
However, it’s unlikely to tumble to the worst level of US$20 forecast by Goldman Sachs in the short term.
The WTI benchmark has kept trending lower so far this year, and we’ve seen marked drops every time when the 10-day average falls below the 50-day average.
It happened late last month, followed by a 12 percent slide so far.
And it tumbled 36 percent and 9 percent respectively on the two previous occasions.
The WTI price may tumble further below the previous trough of US$39.22 on Aug. 24.
This article appeared in the Hong Kong Economic Journal on Nov. 19.
Translation by Julie Zhu
– Contact us at [email protected]