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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The Fear Factor Is Back For Oil

Saber-rattling in the Middle East and the continued deterioration in Venezuela have once again trumped considerations such as supply and demand in the fluctuations of global oil prices. Despite what looks like still ample global supply, both Brent crude and West Texas Intermediate have risen this week on the back of geopolitical fears.

The highlight of the week in this respect was no doubt the sabotage of four vessels off the Emirati coast that U.S. authorities said may have been caused by Iran. The sabotage reports were followed by reports of a Houthi attack on two Saudi oil facilities. Meanwhile the U.S. sent an aircraft carrier to the Middle East in what was overwhelmingly perceived as the next step in an escalation between Washington and Tehran.

This would have been enough to push prices a lot higher in just a couple of days as fears about supply from the Middle East are perhaps the most traditional of bullish factors for prices. However, this time the increase has been limited and this is because although they have been receiving less attention, oil fundamentals remain on the scene and they seem to be bearish for benchmarks right now although the situation remains highly volatile and this is working in bulls’ favor.

Take Venezuela, for example. According to OPEC’s latest Monthly Oil Market Report, Venezuela’s oil production surprisingly inched up in April, to 768,000 bpd from 740,000 bpd in March. However, a PDVSA report seen by S&P Global Platts has revealed that since the start of May, production has slumped by as much as 77 percent to 169,800 bpd because of the lack of tankers to carry the crude.

"The US sanctions have impacted the international market and have increased the cost of freight to Venezuela, the availability of shipowners to provide such services and the final cost of the products, placing PDVSA in an unfavorable and weak negotiating position," another report said. Related: U.S. Oil Rig Count Dips To 14-Month Low

There is also Libya, where the fight between the Libyan National Army of U.S.-backed General Khalifa Haftar and the UN-recognised Government of National Accord has reached a stalemate but it can yet affect oil production, which for the time being has been spared any new outages.

Yet on the other hand there is news from Canada that several oil producers will expand production this year despite pipeline constraints; assurances from Saudi Arabia and the UAE they would be happy to cover for any loss in Iranian oil; and, of course, booming oil production in the U.S., where, according to Rystad Energy, shale is now the second-cheapest source of new oil supply. That, combined with lower oil demand expectations from the International Energy Agency has been enough to keep a lid on prices, preventing a major spike and a consequent slump in demand.

That said, the oil market loves to fear wars and supply disruptions. This means that despite the fundamental factors that would suggest prices should be lower, the coming weeks would likely bring more uncertainty and more price rises until the dust settles in the Middle East or – always a possibility in the region – the situation escalates further and so do oil prices.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on May 19 2019 said:
    There has been a lot of anxiety in the global oil market that the recent escalation of tension between the United States and Iran could lead to war. That anxiety was amplified by the recent drone attacks on two oil pumping stations in Saudi Arabia and the reported sabotage of four vessels off the UAE's coast.

    Still, the global oil market hasn’t re-balanced yet meaning that the existing glut is capable of taking care of any sudden disruption in the short term. That is why oil prices haven’t risen steeply despite the escalation of tension.

    War is neither an option for Iran nor for the United States. Such a war would engulf the whole Gulf region and also Israel causing huge damage to their economies and also to US national interests in the Middle East and a disruption of oil supplies pushing the oil price to $130 a barrel or even higher. That would exacerbate US budget deficit and add significantly to the $22 trillion of US outstanding debts. Moreover, it could cost President Trump his second term at the White House.

    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.

    President Trump doesn’t want a war with Iran because he has a far bigger war to worry about, namely the trade war with China.

    The trade war between the two superpowers could be a game changer for the economic and geopolitical balance of power in the 21st century. The war is not about trade surplus and so-called malpractices by China. 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, the new order in the 21st century, China’s overwhelming dominance in the Asia-Pacific region and its claiming of sovereignty over 90% of the South China Sea and above all the fear of the US losing its unipolar status. It is a truth universally acknowledged that a great power will never voluntarily surrender pride of place to a challenger. The United States is the pre-eminent great power. China is now its challenger.

    Still, owners of oil tankers and insurance companies are justified in feeling some anxiety over the escalating tensions in the vicinity of the Strait of Hormuz and wanting to hike costs of shipping and insurance thus adding to oil prices. That is exactly what Iran is banking on when it threatens to close the Strait of Hormuz as it gives credibility to its threat of closing the Strait.

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

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