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Oil Flat Despite Middle East Tensions

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Friday, June 14th, 2019

Oil prices spiked in early trading on Thursday by more than 4 percent on news from the Gulf of Oman of a tanker attack, but benchmark prices gave up some of those gains as the day wore on. In early trading on Friday, crude oil was mostly flat, as traders seemed to return to focus on fundamentals. A falling rig count then caused prices to climb.

Tensions skyrocket on tanker attacks. Two oil tankers were attacked on Thursday in the Gulf of Oman, and the U.S. government says Iran is to blame. Iran denies the charges, saying that the U.S. is waging a war of disinformation. U.S. Central Command released a video that apparently showed an Iranian patrol boat removing an unexploded mine from one of the tankers. But some experts say it is not enough evidence to jump to conclusions. Still, with tensions on the rise, the possibility of an all-out military conflict is higher than at any point in recent memory. At the same time, officials in both Tehran and Washington said that they want to avoid war. Oil prices have mostly shrugged off the news,…


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  • Mamdouh Salameh on June 15 2019 said:
    While geopolitics plays a role in the determination of oil prices, economics always trumps geopolitics. That is why oil prices were virtually flat despite the attack on two oil tankers in the Gulf of Oman.

    The recent attacks on two oil tankers: one Japanese-owned and the other Norwegian in the Gulf of Oman on the 13th of June could be a deliberate attempt by hawks in the Trump administration, Israel or Saudi Arabia to scuttle mediation efforts by the Japanese Prime Minister who was visiting Tehran at the time of the attacks carrying a letter from President Trump to Iran’s Supreme leader, Ayatollah Ali Khamenei who refused to receive it.

    US Central Command released a video purporting to show what looked like a patrol boat of the Iranian Revolutionary Guard approaching one of the tankers and removing what the video claimed to be an unexploded limpet mine from the Japanese-owned tanker. The Iranians emphatically denied the accusation saying that the Iranian boat was merely helping to rescue sailors of one of the stricken tankers. Meanwhile, the owner of the Japanese tanker that was hit contradicted the American video by reporting that their tanker was hit by flying objects and not by a mine.

    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.

    Still, war with Iran is not an option for the United States either because the damage to US national interests in the Middle East and economy will be unimaginable causing oil prices to surge to more than $130 a barrel. That would exacerbate US budget deficit and add significantly to the $22 trillion of US outstanding debts. It could also cost President Trump the election for a second term in office.

    President Trump has a far bigger war to worry about, namely the trade war with China.

    The trade war between the two superpowers is principally not about China’s trade surplus and alleged Chinese malpractices. It is about the petro-yuan undermining the supremacy of the petrodollar and by extension the US financial system, Taiwan, refusal by China to comply with US sanctions against Iran, China’s overwhelming dominance in the Asia-Pacific region and its sovereignty claim over 90% of the South China Sea, the new order in the 21st century and above all fear of the US losing its unipolar status.

    If President Trump continues to escalate 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.

    Some of these weapons have been described as China’s nuclear options. The first is for China to offload its holdings of US Treasury bills estimated at $1.3 trillion. That would immediately cause a steep devaluation of the dollar 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.

    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’.

    An end to the trade war could easily send oil prices surging beyond $80 a barrel bolstered by robust oil market fundamentals and indications that OPEC+ is leaning towards extending the production cuts until the end of the year or until the global oil market is irrevocably balanced.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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