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Geopolitical Risk Can’t Keep Oil From Falling

Oil prices are now responding to daily doses of rhetoric related to Iran, with WTI and Brent inching higher Thursday following the Pentagon’s vow to deploy equipment and personnel to Saudi Arabia to boost defenses. WTI pared some earlier losses from the day before on surprise news of a US crude buildup, and Brent finished higher Thursday, but the Pentagon’s announcement doesn’t really have market legs, particularly once it becomes clearer, beyond the headlines, that the deal calls for only 200 support personnel, one patriot battery and four sentinel RADARs. Today, oil prices have headed lower already, gearing up for a weekly loss, due to the fast pace of Saudi production recovery and slowing Chinese economic growth eating away at demand outlook.

US Sanctioning Chinese Shippers Benefits Saudi Arabia

The US has slapped sanctions on Chinese firms for “knowingly engaging” in transporting Iranian oil. The sanctioned firms include two tanker subsidiaries of Chinese state-owned shipping giant Cosco Shipping Corporation. Inevitably, this has caused a lot of scrambling among traders to get in front of sanctions.

Oil traders in Asia found themselves in a rush to cancel bookings with these companies and will also have to let provisional charters expire. What’s more, oil cargoes that have already been loaded onto vessels of these sanctioned entities are questionable. It is unclear whether already loaded oil will need to be offloaded and reloaded onto a nonsanctioned vessel, or whether oil that has already been loaded made it under the wire and will be allowed to deliver without penalty. The sanctions arena was complicated enough before this.

In the meantime, it’s worth noting that while China insists it is entitled to import Iranian oil, it’s purchases have tapered off drastically. In August, they fell to 787,657 tonnes, which is down from 926,119 tonnes the month before. But the recent monthly data is nothing compared to the bigger picture: A year ago, China was purchasing 3.28 million tonnes of Iranian oil. Saudi Arabia has been a big beneficiary, of course. China has increased its Saudi crude intake exponentially, purchasing 7.79 million tonnes in August--double what it took the same month last year.

And while traders are now scrambling to get in front of the new sanctions, the war of rhetoric continues with no real move towards a war other than vague statements coming out of Riyadh that a military response to Iran - which continues to deny involvement in the Sept 14 attacks - is “possible”. The markets aren’t buying it, for the time being.

Iran continues to push for a response of some kind in its favor, and it’s going for the ultimate leverage in response to Trump’s transactional nature. In its latest salvo, Tehran has confirmed that it’s using advanced models of centrifuges to enrich uranium in breach of the 2015 nuclear agreement that the US pulled out of. Iran is not, however, increasing enrichment levels. This is just part of the bargaining process.

And Iran is already lining up the victories in Yemen, the site of the major event that preceded the attacks on Saudi oil facilities. Now, not only has the UAE given up on this war, but days after the attack, the Houthis declared a unilateral ceasefire. That has now prompted the Saudis to agree to a partial ceasefire. Mission accomplished on that playing field.

Ethanol Becomes A Key 2020 Election Topic: Here’s Why

The corn lobby and the oil industry in the US have been at odds forever, but now, Trump is looking to keep both sides happy in the runup to the 2020 elections.

The renewable fuel standard played a major role in past elections, and this election will likely be no different. Trump has already issued significant waivers to oil refineries, which will excuse them from the tough blending requirements. That Trump first appeased the oil industry is telling, and the administration had been counting on corn country support, which helped to solidify Trump’s win in the last election. On Trump’s first run, he garnered support from the corn belt, which had previously been carried by Obama.

But the corn belt has grown anxious about Trump’s courting of oil refineries on ethanol requirements, and the administration is growing anxious itself. It needs the corn vote. With that in mind, Washington is now assuring the corn belt that it will come up with a workable solution for both sides. Re-election could very well be at stake over this.

The corn lobby, though, must proceed cautiously. It doesn’t have many friends left. The Democrats used to be their biggest champions, but ethanol isn’t all that attractive anymore. Environmentalism is a key focus of the Democrats’ platform, and environmentalists don’t think ethanol is nearly clean enough. The corn lobby, then, could end up getting shunned by both sides.

Where does this leave ethanol, which was once the promised hope of America’s energy independence? On shaky ground, we suspect, and not just because it has become clear that ethanol isn’t furthering America’s energy independence. Trump may not need to win over enthusiastic support from the corn lobby - he may only need to garner more support than the lobby is willing to give the Democrats. This may leave the corn lobby without a champion.

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