Oil demand is looking shaky, and cracks in the global economy are also a major headwind, but there is a case to be made that oil prices could rise in the weeks ahead.
A price rally isn’t inevitable, but due to so many unexpected factors working in concert, the oil market is experiencing some upward pressure on crude even as demand is flagging. First, and most obvious, is the U.S.-Iran tension, which is clearly not going away anytime soon. The U.S. decision to pull out of the nuclear deal a year ago set the stage for today’s collision course.
With Iran’s back against the wall, it too has now decided to exit the accord, although in an incremental fashion. American officials are citing the withdrawal as further justification to ratchet up the pressure. So far, oil flows have not been disrupted in any major way, but risks to tankers and of a broader conflict remain a top concern. On Wednesday, President Trump tweeted that sanctions on Iran “will soon be increased, substantially!”
In addition, OPEC+ recently extended the production cuts, ensuring that at least 1.2 million barrels per day (mb/d) remains offline for another 9 months. However, an unexpected supply outage hit Russia over the last few months. Due to the Druzhba pipeline contamination crisis, Russian oil production has plunged to a three-year low. With output at just 10.79 mb/d in early July, Russia is producing roughly 400,000 bpd below its agreed upon target as part of the OPEC+ cuts. “For this reason, the pipeline operator Transneft is only accepting limited amounts of oil from Rosneft, the largest Russian oil company,” Commerzbank wrote in a note. “Poland is now apparently receiving oil again through the affected Druzhba pipeline, yet the pipeline operator has warned that further disruptions cannot be ruled out.”
Meanwhile, the U.S. has seen some rather significant declines in oil inventories for consecutive weeks, another trend helping to push up oil. The EIA reported a massive 9.5 million decline in crude stocks for the first week of July, and stocks have plunged by 26.5 million barrels over the past month, reversing what had been a rather substantial buildup in inventories. Related: Saudi Aramco Awards $18B Deals To Sustain 12-Million-Bpd Oil Production Capacity
In Venezuela, a blackout disrupted operations at Venezuela’s main refinery complex, threatening to impose even more disruptions to production and exports. The two refineries have a nameplate capacity of 940,000 bpd.
The next looming threat for Venezuela is the expiration of a waiver that Chevron has from the U.S. government, which allows it to continue to operate in the country. The waiver expires later this month, and the Trump administration is considering letting it expire as a way to inflict more damage on Venezuela’s oil industry. If Chevron was forced to exit, another slice of Venezuela’s oil production could be put at risk.
When asked about whether the wavier would be extended, President Trump’s economic adviser Larry Kudlow said “it is under discussion.” However, S&P Global Platts reported that the U.S. is “strongly considering” letting the waiver expire. If it did so, Chevron and a handful of other companies would likely have 60 to 90 days to exit the country.
Earlier this year, when the Trump administration was more confident in its regime change campaign, it saw Chevron playing a crucial role in a post-Maduro era, which would likely have included a swift effort at privatization.
“We’re in conversation with major American companies now,” national security adviser John Bolton said in January, just a day after Juan Guaidó launched his initial effort at toppling Maduro. “I think we’re trying to get to the same end result here. … It will make a big difference to the United States economically if we could have American oil companies really invest in and produce the oil capabilities in Venezuela.” Related: Here’s Putin’s Answer To The U.S. Shale Boom
However, with the coup having failed, hawks in the U.S. government may now view Chevron’s ongoing operations as bolstering Maduro. Still, it isn’t an easy calculus. Those same hawks may also fear that by pushing out Chevron they will give more room for China and Russia to increase their presence in Venezuela, a development that would be anathema to the imperialist instincts of the Washington foreign policy establishment. So, it’s not clear which way the U.S. will come down on this issue.
Finally, yet another factor that could work in a bullish direction for crude oil is the near-certain decision by the U.S. Federal Reserve to cut interest rates later this month. Fed chairman Jerome Powell testified to Congress on Wednesday, where he conceded that growth has slowed around the world, inflation remains low, and trade concerns dominate. Based on the positioning of investors, the markets put the odds of a 25 basis point cut at close to 100 percent.
All of these factors are working in one direction. Demand is still a major concern, but in early trading on Wednesday, both WTI and Brent were up more than 3 percent.
By Nick Cunningham of Oilprice.com
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