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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Oil Prices Likely To Soar On Geopolitical Risk

Brent crude prices rebounded to $70 per barrel during midday trading on Tuesday as fears of a trade war eased on conciliatory comments from both the U.S. and China. That allowed the prospect of geopolitical uncertainty to reemerge as a driver of oil prices.

Even as President Trump mulls $100 billion in additional tariffs on China, as reported last week, U.S. officials took to the airwaves over the weekend to downplay the significance of the trade dispute. Trump’s trade adviser Peter Navarro, considered one of the main voices pushing for stiff tariffs, sounded more low-key (for him) on the Sunday talk shows. “We’re listening to the Chinese. We’re willing to work with them,” Navarro said on NBC News’s “Meet the Press.” Although he went on to add: “But we’re clear-eyed about this. We’re moving forward on a measured way with tariffs, with investment restrictions,” he said. “What we want from China is very clear. We want fair and reciprocal trade.”

Secretary of Treasury Steven Mnuchin was more measured. “Whatever happens in trade, I don’t expect it to have a meaningful impact on our economy,” he said.

Chinese President XI Jinping also said on Tuesday that he would continue to lead to an opening of China’s economy, which would also result in lower import tariffs. His tone was widely interpreted as an attempt to tamp down the flames of a trade war with Washington.

As such, fears of a trade war have once again declined, although given the impulsive decision-making by the White House, that could obviously change at any moment. “It's not so much 'risk on/risk off', as it is 'trade war on/trade war off' and, at the moment, we're 'trade-war off',” Jasper Lawler of London Capital Group, told Reuters.

The lessening of trade concerns as a drag on oil prices allowed geopolitical risk to reemerge, pushing up oil prices at the start of the week. Brent crude jumped to $70 per barrel, having gained nearly 5 percent over two trading days.

There is no shortage of risk to supply, and if U.S.-China negotiations succeed in heading off a brutal trade war, oil could be heading much higher.

That is because there are several points of crisis that could crop up just in the next few weeks alone. First, Venezuela’s oil production continues to melt down, resulting in concrete losses to global oil supplies. Output fell by another 100,000 bpd in March, dipping to just 1.51 million barrels per day. Related: Offshore Rig Builders Face New Reality

The declines are expected to continue but could be made much worse if the U.S. decides to impose sanctions on Venezuela and/or state-owned oil company PDVSA. Venezuela’s President is planning on holding a sham election in May, which could spark retaliation from Washington. Sanctions – whether on Venezuelan imports to the U.S. or on U.S. diluent heading to Venezuela – threaten to accelerate the declines underway in the South American nation.

A second geopolitical flashpoint that could reignite is the U.S. confrontation with Iran. President Trump needs to decide a course of action by May 12, and all signs point to a withdrawal from the Iran nuclear deal, and the potential re-implementation of U.S. sanctions. That could result in the loss of perhaps 500,000 bpd within 12 months.

In the short-term, U.S. military action in Syria could add upward momentum to oil prices. Oil markets tend to trade oil higher when missiles are launched in Middle Eastern countries. The price effect should be temporary, however, as Syria is only a marginal producer of oil. The impact on oil should be minimal to nil, assuming the conflict does not suck in U.S. forces into a protracted conflict that could very well escalate into a U.S.-Iran proxy war.

Meanwhile, Saudi Arabia is rumored to be targeting $80 oil, with an eye on the Aramco IPO. While that is unlikely to be official policy, it suggests that the Saudis won’t necessarily step in with more supplies in the event of an outage. Without that supply backstop, the market could tighten and force prices up, which would work to the benefit of Riyadh. Related: Disaster Hits Canada’s Oil Sands

The backdrop of a tightening oil market is the crucial thing to remember he  re. There has been the occasional outage in the last few years (Libya, Nigeria, Canadian wildfires, hurricanes, the OPEC cuts, etc.), but the difference today is that the inventory surplus has nearly been eliminated. OECD inventories fell to just 53 million barrels above the five-year average in January, down from more than 300 million barrels a year earlier.

In the next few months that surplus will likely disappear altogether. And that is even before we account for unexpected geopolitical disruptions, which means any unforeseen event that affects supply could significantly push up oil prices.

By Nick Cunningham of Oilprice.com

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  • PETERGRT on April 10 2018 said:
    Cacophony of red herrings:

    1. Trade war fears were/are way overblown, but its potential affect on the price of oil is perhaps the most overrated claim.

    2. Venezuela - the market already has written off that basket case. In fact, as a result of the impending collapse and many of their oil assets being taken over by the Chines and the Russians, it is more likely that their oil production would increase . . . .

    3. Syria, while a serious problem area, it is inconsequential in terms of oil, and the war there had no affect on oil . . . .

    4. Iran - even if US were to reimposesomething the sanctions, the Europeans and the rest of their customers would not abide, even in the extremely unlikely event that UN would reinstate such sanctions . . . . .

    That said, the one geopolitical event that may actually have a direct impact on the oil is the brewing conflict between the Saudis and Iran, particularly through the Sudan scrimmage. There were a host of rockets already fired directly onto Saudi cities and oil facilities, and just a couple of days ago there was an attack on a Saudi tanker - none of those attacks have thus far succeeded, but if and when something as these attacks generate a real damage, than that would make the oil price more interesting . . . .
  • Neil Dusseault on April 10 2018 said:
    I just want to remind everyone that prices will only go in the direction you trade them to go.

    So, in lieu of various news (e.g., Syria, trade wars, API/EIA reports and those from Baker Hughes, etc.) each trader has a choice of: Going long, shorting the market, or trading abstinence...I highly recommend the latter for anyone considering going long, as buying into the market would cause everyone to pay more for everything.

    It also means you are complicit in making Russia and Saudi Arabia richer, among other countries. Thus, if you must trade, create a downward momentum...let a bearish trend provide all the volatility and liquidity you dream of, and not only will you make money, buy everyone else will save money and you'll also have the satisfaction of knowing you weren't an enabler to OPEC & NOPEC.
  • Sal Haperdunk on April 11 2018 said:
    Excellent article. The trade war has really beaten up the markets lately and caused oil to crash into the low 60’s recently. My number one fear these days I’d of a trade war. I was told Trump would get us into one. Sal
  • paul on April 11 2018 said:
    The Chinese government knows we supply their people with food and energy and we owe them a lot of money. They know they have been taking advantage of the citizens of the USA because our government invited them to do so.

    Good luck with the negotiations...
  • John Brown on April 11 2018 said:
    LOL! U.S. production is soaring, and as the price of oil is manipulate higher and higher it will continue to soar. So the reality is that Geopolitical risk is actually declining, that is unless you believe that soaring U.S. production is at risk with WTI over $65?
    The Saudis we're told want the price of oil at $80 for their Aramco IPO, and the rest of the oil and financial industries and the markets want it their because everybody makes more money the higher the price goes, so we can expect lots of scary stories to manipulate the price higher and higher. The reality is their is plenty of oil sloshing around the place, and plenty of idle capacity just sitting around. The price of oil isn't going up because of lack of supply or production capacity, its going up because everybody involved in the market wants it up.

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