War and a missile, but low oil prices? What gives?

Sudan has declared war on South Sudan, India has fired a long-range missile, yet oil and gasoline prices are down.What is going on?

Common sense has come over our much-scorned oil trader friends in New York and London.

For months, there has been a global surplus in oil and gasoline, which should mean lower prices than we have seen. Yet, because of geopolitical tension such as the trouble between Iran and the rest of the world, prices have not dropped — until now.

Oil prices are down again today, a declining trend that seems genuine when you get no bump-up despite official war between two modest oil-producers, and a missile test by a nuclear power with menace toward China.

The turn began two weeks ago with a sharp withdrawal from the futures market by hedge fund and investment bank traders, writes the Wall Street Journal’s Konstanin Rozhnov. Venezuela is unhappy about the supply bulge, which has been assisted by growing volumes from Libya and Saudi Arabia. But, short of outright war involving Iran, prices look like they will continue to moderate.

I exchanged emails with Nick Butler, a former top lieutenant to John Browne at BP and now chairman of King’s Policy Institute at King’s College London. In an op-ed at the Financial Times, Butler forecast a plunge in oil prices, and I asked whether he thinks U.K.-traded Brent crude — currently trading at over $117 a barrel — will fall as far as the $80s-per-barrel range. "Who knows?" he replied. "I think [prices] will overshoot going down, and then stabilize back at $95 to $100.  But that is probably too rational." Butler does not think, like some of us, that pure good sense has conquered the market for now.

Whatever the source of the decline, one beneficiary is President Barack Obama, who has been pummeled by his Republican opponents for high gasoline prices.

So why did India fire an Agni-V (pictured above) with the the explicit aim of demonstrating the capability of reaching Chinese cities like Beijing? The reason is a peculiar notion of regional power, since actual war — particularly on the scale of a missile exchange — between the two countries is highly improbable. It is annoying for those who watch global stability because it erroneously suggests that such a conflict is possible.

As for the escalated trouble between Sudan and South Sudan, the friction goes back to long-standing warfare preceding last year’s division of Sudan. Most of the oil went with South Sudan in the partition, and the two sides never figured out how to divide the income. So Sudan has demanded an extraordinary tariff of $32 a barrel for South Sudanese oil shipped by pipeline to Port Sudan, leading South Sudan to shut off its oil flow entirely. Most recently, fighting has broken out over the oil-producing town of Heglig, which both sides claim.

I spoke with Richard Downie, deputy director of the Africa program at the Center for Strategic and International Studies. Downie does not see an early resolution of the trouble. "There’s been a history of 11^th-hour dealmaking where both sides have walked up to the precipice, looked over and eventually stepped back," he said. "But I think this dispute is on a different level of seriousness because it involves such a critical level of their economies." Downie said:

They’re in a mutually assured destruction mode because they are so dependent on oil. If you put a positive spin on that, you would say, ‘Okay, these two sides are so economically interdependent, so dependent on oil, they just have to reach an agreement.’ On the negative side, you would say this is such an important part of their economy, that they can’t give ground. They have to fight.

You take your choice on whether you are an optimist or a pessimist. … At the moment, I am not very optimistic they are going to be able to thrash out a solution.