A crude bull run on crutches

January 12, 2020

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Gas flares from an oil production platform at the Soroush oil fields in the Persian Gulf, south of the capital Tehran.—Reuters file
Gas flares from an oil production platform at the Soroush oil fields in the Persian Gulf, south of the capital Tehran.—Reuters file

IRAN had little option but to retaliate. So it did, targeting the US bases in Iraq. Yet, the reaction was ‘calculated and muted’. Tehran intentionally avoided targeting areas with Americans, CNN reported, quoting several Trump administration officials. The resolution adopted by the Iraqi parliament asking all foreign forces to leave the country provided some consolation to Iran. This may have helped Tehran to take only a symbolic action against Washington in the ongoing war of nerves.

The message was clear on the US too. President Donald Trump’s speech after the missile attacks signalled easing of tensions. It increasingly became obvious that both Tehran and Washington wanted to scale down the temperature. Hence, rather than signaling a military response to the Iranian missile attacks, Trump vowed to impose new sanctions on Iran.

Crude markets took the cue, tumbling 4 per cent, in a go. In a dramatic pullback from the high of $65.65 late Tuesday, after Iran lobbed missiles on US military bases in Iraq, crude dipped. Oil headed for its first weekly loss since November last year.

Oil futures too fell sharply on Wednesday, logging lowest settlement since mid-December.

In the meantime, the US House of Representatives also voted on Thursday to limit President Trump’s authority to strike Iran. America received indications that the Islamic Republic has asked pro-Iran militias in the Middle East not to carry out attacks against US interests, Vice President Mike Pence said in comments to Fox.

The prospects of a supply disruption from the Middle East were clearly receding.

Data from the US Energy Information Administration also helped the crude markets ease further. During the week ending January 3, US crude supplies went up by 1.2 million barrels.

However, until then, crude markets remained in flux, reacting to virtually every move. Confusion was ruling. Prospects of war had already pushed oil prices to a seven-month high. The tone and tenor of Washington were enough to keep the crude markets rattled. The US was throwing around wild threats, and not just towards Iran, but also Iraq, after its Parliament passed the resolution urging the United States to leave the country.

In a sharp reaction to the resolution, Trump vowed to hit Iraq with penalties “like they’ve never seen before,” if American troops were forced out on an unfriendly basis. “It’ll make Iranian sanctions look somewhat tame,” the president told reporters aboard Air Force One.

Interestingly, in a chaotic afternoon in Washington last Monday, the US denied it was pulling its forces out of Iraq after a leaked letter to the effect, apparently from the top US general in Baghdad to his Iraqi counterpart, emerged. This added to the confusion. Washington denied. “There’s been no decision whatsoever to leave Iraq,” Mark Esper, the US defence secretary said later.

Although how the Iraqi parliament resolution could be implemented remains a mystery. Yet, one thing was certain: For Washington to isolate Iraq could have caused further upheaval in the crude markets.

Iraq is the second-largest oil producer within the Organisation of the Petroleum Exporting Countries (Opec), behind only Saudi Arabia. It produced 4.6 million barrels of crude per day in November. In the prevailing scenario, markets were in no position to overlook these numbers.

Sidelining Iraq’s output could have exacerbated fears of a supply shock that was already in play after General Soleimani was assassinated. Prices could have spiked, analysts underlined. “If there were Iran-style sanctions that made Iraq’s oil toxic to the rest of the world, that could have driven prices up quite sharply,” Bob McNally, president of Rapidan Energy Group was quoted as saying.

In an election year, Washington couldn’t have afforded higher prices at gas stations. “President Trump is clearly bound by the election dynamics to ensure the markets are supported and the economy does not suffer an oil shock,” Matt Gertken, a geopolitical strategist at BCA Research was quoted as saying.

Tom Kloza of the Oil Price Information Service doubted ‘the president will tolerate $70-plus crude or $3-plus gasoline in red states’. By the end of the year, Kloza estimated WTI crude and Brent to be in the mid-$50s a barrel range – a 10pc to 20pc drop from current levels. And, that should translate into cheaper fuel at the pumps.

Deescalating the situation and cooling down the war theatre was a better bet for President Trump and he went for it. Crude markets had short legs to carry on the bull run and they retreated at the first possibility.

Published in Dawn, January 12th, 2020