The bulls have gained the upper hand in oil markets of late, with estimates of $90 oil before the end of the year. The driving factor behind this renewed bullishness is the re-imposition of sanctions on Iran that threaten to significantly impact Iranian exports. While this bullish sentiment is certainly justifiable, there are also plenty of bearish catalysts looming over markets that should not be ignored. The most important of these catalysts is the possibility of an all-out trade war between China and the U.S., an outcome that is very much plausible. Oil prices in the coming months are likely to be influenced most heavily by these two contrasting factors – with Iranian sanctions sending prices up while trade war escalations sending them down.
The U.S. and Iran saga has had a grip over oil markets for the last three months. Oil prices spiked in May when Trump announced that he was imposing sanctions on Iran and leaving the Joint Comprehensive Plan of Action (JCPOA). Now, as the first round of sanctions goes into effect, the relationship between Iran and the U.S. has become increasingly strained. The second round of sanctions, which is going to focus on the energy sector, will have a much higher impact than the current round. According to different estimates, sanctions could take anywhere from 1.5 to 1 million barrels out of the market. This combined with the recent worries about spare capacity and the ongoing tension in the Arabian Peninsula (between Yemeni Houthis and KSA) may well drive prices towards the much-hyped $90 mark.
While there is certainly a possibility of a more than one million bpd decline in Iranian oil, there are some who suggest the decline will be significantly less than that. It is important to note that India and China account for almost 50 percent of Iranian oil exports between them and likely have the ability to boost their imports.
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The stance of India is a little vague, but they have cleared that they will only comply with UN mandated sanctions and are reportedly looking to find alternate ways of payment in order to continue buying oil from Iran. China has clearly stated that it will not implement any cut in its imports from Iran. EU, accounting for another big chunk of Iran’s oil, wants to retain the current Iran deal and is trying its best to rescue it.
So, while Iranian sanctions may excite oil bulls, they remain very much a wild card for oil markets.
The second major factor to watch in today’s oil markets is the ongoing trade war between China and the U.S. President Trump recently escalated this trade war with a second round of sanctions on $16 billion worth of Chinese products. China has said that it will retaliate with $60 billion of its own tariffs and has made it clear that it will not back down. It is generally accepted that trade wars are bad for the global economy, and the oil market is no exception. Oil prices tanked 3 percent in a single day after Trump announced the $16 billion tariffs. As these tariffs continue to escalate the impact on oil markets will likely grow.
Shan Saeed, Chief Economist at IQI Global, Malaysia and APEC region, is very bullish on oil and sees it at $100, claiming that “Geopolitical risk and tight supply constraint have given oil prices a new head to stay on the bullish course. Understanding geography is a real virtue for sophisticated investors”. On the demand side he added that “demand for oil would touch 100 million barrel per day by Q-3/2019.”
The influence of sanctions on oil prices, however, is subject to the response of China, India, the EU and Iran itself. Bulls may well have an argument, but they lack any sort of certainty when it comes to quantifying the impact of sanctions. The outcome of the trade war by comparison, is quite certain: lower oil prices. It is this certainty that might give oil bulls pause for thought as the end of the year looms.
While other factors such as inventory figures, rig count, global demand and supply will continue to shape oil markets, it is the above-mentioned major factors that are going to have a significant and sustainable effect.
By Osama Rizvi for Oilprice.com
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