Oil prices are highly sensitive to geopolitical events with the Russian invasion of Ukraine, the Iran nuclear talks and attacks on Saudi Arabia by Yemen‘s Houthi rebels prime examples.

There is no shortage of global crude oil reserves, but it has to be extracted (which takes investors willing to risk their capital) and it has to be in the right place at the right time.

Price wars, climate policy, the pandemic and—in Alberta’s case—insufficient transportation capacity, have led to underinvestment in new supply. And even if OPEC has more capacity to increase production than it is letting on, its stated goal is to keep supply in check.

Combining tight supply with the world's third largest oil producer starting a war and you have a recipe for increased volatility and large price spikes.

Sure enough, benchmark oil prices have been on a wild ride since the war began. The closing price of a barrel of West Texas Intermediate crude on the New York Mercantile Exchange went from around US$92 in the days before the Russian invasion of Ukraine to US$123.70 on March 8 to US$95.04 on March 16 to back over US$110 yesterday.

Prices will continue to rise and fall as new information and expectations come to the fore. If the peace talks look promising, prices are likely to fall. If more sanctions are placed on Russian oil, they are likely to rise. If the Iran nuclear talks resume, this will put downward pressure on prices whereas more attacks on Saudi Arabia by Houthi rebels will add upward pressure.

There is also the ongoing pandemic to consider with oil markets anxiously watching as new waves of infection threaten to dampen demand.

Oil prices are notoriously volatile, but current geopolitical conditions are making them even more so. This will almost certainly remain the case until the war is over and the economic shockwaves it has generated dissipate.

Answer to the previous trivia question: The Chicago Tribune claims one of the earliest uses of the term “retail therapy” in an article by Mary Schmich published on December 24, 1986.

Today’s trivia question: How much does a standard barrel of oil weigh?