Geopolitics and the crude saw cutter

October 13, 2019

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IN this June 13, 2019 file photo, smoke bellows from a tanker that attacked in the waters of the Gulf of Oman.
IN this June 13, 2019 file photo, smoke bellows from a tanker that attacked in the waters of the Gulf of Oman.

OIL spiked after the missile attack on Iranian crude tanker, jumping by more than 2 per cent, as early reports about the explosions started to trickle in.

Oil also climbed, earlier in the week, after simmering tensions between Turkey and Syria erupted into a shooting war. Oil prices also posted a significant rise when Saudi Arabia’s oil infrastructure was hit by drones and missiles. That was a massive blow. Yet, markets cooled down within days. Oil also went up when the war theatre against Iran began heating up, as the security of oil shipments across the Straits of Hormuz became an issue.

These developments rattled the markets but not for too long. How could then, the missile attack on an Iranian vessel or the skirmishes around the Turkish-Syrian border make the markets climb and stay there for long?

A number of geopolitical developments are beginning to lengthen their shadow on the oil markets. President Trump’s decision to withdraw forces from Syria could help lower the tension in the oil-rich Middle East. Moreover, the possibility of talks between Saudi Arabia and the Yemeni Houthis could also result in reducing the temperature between Riyadh and Tehran. Prospects of US-Iran talks also seem growing, analysts are arguing.

All these could ease the geopolitical risk in the Middle East making the prices go still lower, Helima Croft of RBC Capital Markets’ told CNBC last week.

In case, Trump opts to end sanctions on Iran, prices would plunge. Even if any tangible signs emerge of Washington preparing to talk to Tehran, many believe prices could tumble. And with President Trump remaining mired in political controversies at home while the election year is approaching, he would want to keep oil prices lower, most believe. Indication of talks with Tehran would boost the prospects of easing of tension with Iran, making lower prices at the nearby gas station a real possibility.

In the meantime, the growing build-up of inventory in the US is also adding to the pressure. Last week, the US Energy Information Agency (EIA) reported a buildup of 2.9 million barrels in crude oil inventory, for the week to October 4. That came after three weeks of inventory increases, with the latest for the last week of September at 3.1m barrels.

In its Short-Term Energy Outlook, the EIA also revised down its average West Texas Intermediate price forecast to $57 a barrel from $62 a barrel by the second quarter of 2020.

The ultimate reason for this gloomy forecast seems to be the uncertainty surrounding oil demand rather than the danger of supply disruptions.

The biggest factor fuelling this uncertainty is the US-Chinese trade spat which last month led to the addition of US oil to China’s tariff list. Another round of negotiations in Washington are underway, but nobody seems to have particularly high hopes.

Oil industry leaders are also pessimistic. Most are of the opinion: oil markets will struggle next year. Vitol SA Chief Executive Officer Russel Hardy told the Oil & Money conference last Wednesday that the ongoing US-China trade dispute was curbing the outlook for crude prices which would be stuck in the US$50s a year from now. Bosses of Trafigura Group Ltd. and Gunvor Group Ltd. agreed, at least in the short term.

“Without some resolution to the trade wars, we’ll remain a little bearish,” said Hardy.

Trafigura CEO Jeremy Weir said the trading house expects a slight recovery in the fourth quarter of 2019 with prices “may be slightly lower from where we are now” in a year’s time. “Particularly with the current trade environment and, a strong US dollar, I would say there’s further downside in the short term” said Weir.

Gunvor CEO Torbjorn Toernqvist said he also sees oil at current levels, of under $60 a barrel, a year from now and that next year the market would “test Opec’s resolve” on its commitment to coordinated output cuts.

Most at the conference echoed the same view, underlining the oil market would remain amply supplied next year. Jeffrey Currie, head of commodities research at Goldman Sach Group Inc., sees Brent crude at $60 over the next two years. The market is pricing in plenty of supply and demand is a concern, Jan Stuart, a global energy economist at Cornerstone Macro LLC added.

Clouds on the crude horizon continue to gather. With the overall crude balance sheet continuing to stay in red, the Opec+ (Organisation of the Petroleum Exporting Countries and Russia) efforts do not seem to be working. Let’s wait what Putin and MBS, the two most powerful men in the oil world, offer to the markets at their meeting later this week.

Published in Dawn, October 13th, 2019