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The Real Reason Oil Prices Crashed

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Osama Rizvi

Osama Rizvi

Osama is a business graduate and a student of international relations. Currently working as freelance journalist, covering commodities and geopolitics.Osama is a regular contributor to a variety…

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The Downside Risk For Oil

Oil prices have spiked more than 13 percent in the past ten days, with WTI touching $75 at one point, the highest since the 2014 price crash. The factors that have contributed are quite vivid. Trump’s request that Saudi Arabia increases its production by 2 million bpd and the ensuing fear regarding the spare capacity. Some issues at Libyan ports added to market fear as well, with production continuing to fall. Canada also played a role with the Syncrude facility closing down, taking down 250,000 bpd offline. Arguably the most influential factor is the increasingly hardline stance that the U.S. is taking in regard to Iranian oil exports. In this bullish environment, it is important to keep an eye on the downside risks to oil and not get carried away with investor sentiment.

With U.S. mid-term elections in November, Trump is set to face increasing pressure. The trade war is already hurting some farmers in the U.S. and the steel and aluminum tariffs are hurting industries of all sorts; from automobile to oil. Trump’s Tweets suggest that higher oil prices are a key concern for his administration. Gasoline prices have surged above $3 and with every increase the likelihood of Trump tapping into the Strategic Petroleum Reserves grows larger. This is one of the key factors that would add downward pressure to oil prices.

One key downside factor that analysts should be conscious of is the easing of sanctions on Iran. Iran sanctions were one of the major reasons for an oil price spike, and the hardline stance taken recently by the U.S. has just made it even more important. If Trump’s administration uses its “case-by-case” analysis of countries to ease the threat of Iran sanctions, then we will almost certainly see more downward pressure on oil prices. Related: Why Natural Gas Hasn’t Dethroned Gasoline

With Trump’s reputation for changing his stance on key issues well documented, and his recent flip flopping on both his Iran policy and his demands on Saudi Arabia’s production, it is not unrealistic to assume he will do all he can to lower crude prices before November’s elections. As well as the November elections, the trade war with China and disagreements within NATO may force Trump’s hand when it comes to punishing Iran and making demands of Saudi Arabia and OPEC.

Interesting times --- Oil markets are behaving in a very interesting manner these days. For example, an increase in production is usually considered a bearish factor and cause oil prices to fall. But with Venezuelan oil production collapsing, disruptions from Libya growing and the Iranian geopolitical scenario alongside rising tensions in the Middle-east (last week Iran issued a threat of blocking straits of Hormuz, a vital choke point), markets are clearly on edge over a supply deficit. This fear in markets may be causing sentiment to play a larger role than fundamentals, and when that sentiment changes, the downside may be far greater than many think. There is still no scarcity of oil, and there is certainly no certainty over what Donald Trump might do next.

By Osama Rizvi for Oilprice.com

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