A slight price recovery on Friday couldn’t save what turned out to be the worst week this year for oil markets.
Brent is currently hovering around $68 per barrel having fallen from a $74 high earlier this year. Increased worries about a possible oil slump, due to the perceived negative impact of the escalating US trade war with China, and unexpected higher stock volumes, have scared mainstream analysts it seems. It seems that the oil market is not being ruled by bulls or bears, but is being sheepish instead.
The combination of a perceived global economic slowdown, higher levels of US oil storage, and rumors of a possible de-escalation of the Iran-US crisis are mitigating the clear and present danger in oil and gas markets. Without a doubt, OPEC+ will be rolling over its ongoing production cut agreement, as the oil cartel and its Russian partner are content with higher crude oil prices and strong demand. The positive effects of US sanctions on Iran and Venezuela, which removed vast volumes of crude from the market, has been a godsend for OPEC+. Trump’s dream of US energy independence is no longer working against OPEC+. The current market situation only emphasizes the power of OPEC+ on the global market. Trumps’ strategy, and the increased geopolitical risk that it brings in Iran, Saudi Arabia and Iraq, has already been taken into account by the market. It is other developments, such as increased political instability in Algeria, a potential breakdown or blockade by Libyan general Haftar’s forces of Libya’s oil production and increased heat in the East Mediterranean, that may well prove to be a game changer for global oil markets. Related: U.S. Energy Storage Capacity Set To Double This Year
US crude inventories, reportedly at their highest level since July 2017, are having an oversized impact on today’s oil market. At the same time, growing fears about the US-China trade war have caused analysts to brace for a slowdown in crude oil demand in the coming months. Both these factors, the trade war and US inventories, are not as serious as the media is making them out to be. The ongoing US-China trade wars is unlikely to become a full showdown. Neither party is willing to risk a full-blown crisis as the results will hit both severely. When looking at China’s options, Beijing will not be willing to risks a situation in which, for the first time ever, the Politburo has to acknowledge that their 5-year planning is not reaching its set growth targets. Beijing will do whatever it takes to get the figures adjusted to quell a possible economic crisis.
At the same time, Trump will not want to risk lower economic growth figures or even a full-scale slump as it would negatively impact his reelection prospects. Don’t forget, Trump’s presidency is almost in its last year, the coming 12-18 months will be targeting positive economic and financial figures to support reelection. The fall-out of a China trade war will mostly hit the US states that are full of Trump supporters. Related: Libyan Oil Industry Stable Despite ISIS Return
When looking at crude oil markets, the situation on the ground is a clearly pro-OPEC. The speculation about a possible end to the OPEC+ production cuts is largely unfounded. Saudi Arabia, Russia and several other major producers are content with the current situation. At the same time, US storage volumes are unrepresentative, as increases are supported by the lack of demand for US shale oil. As some have clearly stated, there is a crisis looming due to crude quality issues. With outages in Venezuela and Iran and instability in Iraq, Sudan, Libya and Algeria, volumes of a certain quality of oil have fallen dramatically. US shale oil should not be considered a savior or swing producer, as it cannot fill the gaps in the current market. Furthermore, Iranian volumes are no longer attractive to its former clients. China, India and even Turkey, are reducing their intake of Iranian crude. Some of crude from Tehran will still enter the market, but not enough.
The market is set for a recovery in the coming weeks, especially if markets continue to overreact to the downside. At the same time, geopolitical risks are much higher than the market wants to admit. A possible proxy-war in the Middle East is a real possibility, with Iraq or Yemen as possible targets. A new confrontation would remove the current ceiling of $75 per barrel with a bang. Observers should be wary of the current bearish narrative in the global oil market.
By Cyril Widdershoven for Oilprice.com
ADVERTISEMENT
More Top Reads From Oilprice.com:
- Saudi Arabia Scrambles To Calm Oil Markets
- How Trump And Xi Killed The Oil Rally
- Red Flag For Oil Markets: Asian Refining Margins Plunge To 16-Year Low
The oil price is underpinned by robust fundamentals in the global oil market, insatiable thirst by China for oil with Chinese imports projected to exceed 11 million barrels a day (mbd) this year and OPEC+ production cuts which could re-balance the global oil market by July.
Were the US/Iran tension to escalate into a shooting war, then we could see oil prices breaking through $110-$120 a barrel.
However, war is not an option for either the United States or Iran. Iran is not seeking a war with the United States but it will retaliate if its crude oil exports were prevented from passing through the Strait of Hormuz.
President Trump doesn’t want a war with Iran either because he has a far bigger war to worry about, namely the trade war with China.
President Trump and his advisers shouldn’t overestimate the United States power vis-à-vis China. They should realize that China will never kowtow to the United States and that it is biding its time and sharpening its claws and that Washington’s current unipolar order will soon be a thing of the past.
If President continues escalating the trade war and tries to push China into a corner, he will find that China has very powerful weapons in its arsenal capable of inflicting real harm on the US economy and the dollar.
One weapon is for China to retaliate by offloading its holdings of US Treasury bills estimated at $1.3 trillion. That will immediately cause a steep devaluation of the dollar thus leading to a serious exacerbation of both the US budget and US outstanding debts.
The other weapon is for China to impose an embargo on the supply of rare earth minerals to the United States. That could potentially cripple large swathes of US industry from smartphones, turbines, lasers, missiles, advanced weapon sensors, stealth technology and jamming technology to name but a few. By the time the United States finds alternative supplies, the damage would have been done.
China gave two hints that if the trade war escalates further, it could resort to these weapons. The first is when Chinese President Xi Jinping visited on Monday an obscure factory of rare earth minerals.
The second hint is when he likened China’s determination to face down the United States in the trade war to the Red Army’s Long March which ended in the victory of the communists in China. What President Jinping was telling President Trump is that China will never capitulate no matter how long the trade war takes.
Eventually President Trump will have to back down and end the trade war because the war is already costing the US economy far more than China’s. China’s economy is 28% bigger and far more integrated in the global trade system than the United States thus being able to withstand the strains of the war far more than the United States.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
So which issue will be the most important, lack of demand from reduced economic activity and/or not enough real oil making it to market?