Crude heads into an abyss

Published April 26, 2020
ZHUHAI (China): Oil and gas tanks are seen at a warehouse in this file photo. World economy has taken a hit after the US oil price dropped below zero earlier this week because of decline in demand from the pandemic and a price war between Russia and Saudi Arabia.—Reuters
ZHUHAI (China): Oil and gas tanks are seen at a warehouse in this file photo. World economy has taken a hit after the US oil price dropped below zero earlier this week because of decline in demand from the pandemic and a price war between Russia and Saudi Arabia.—Reuters

WHAT could salvage crude markets from the abyss? Heightening of tensions in the oil-rich Middle East?

The American oil industry, President Donald Trump’s major support base is in doldrums, and, in an election year. In the US, the worlds’ biggest oil producer, operators have started shutting wells and halting drilling – steps that could cut output by 20 per cent and leave thousands of workers unemployed. Some 1.75 million barrels per day (bpd) is at the immediate risk of shutting down while the number of new wells being brought online is forecasted to plunge almost 90pc by the end of the year, according to IHS Markit Ltd.

The president needed to do something to consolidate his support base and boost his electoral fortunes. It now seems President Trump is ready to take that disastrous route and drum the war chorus. After all, as per Rabobank analysts, simmering tensions is “perhaps the oldest Middle East oil trick in the book: you want higher oil prices, threaten to start breaking things.”

In the wake, last Wednesday, President Trump tweeted he has ordered the US Navy to “Shoot Down And Destroy” Iranian gunboats if they harass US ships.

A week ago, a group of 11 Iranian patrol boats made some “dangerous and harassing” manoeuvers near US warships, passing within 10 yards of a US flagged vessel. After badgering the US vessels for around an hour, the Iranian boats left the scene.

This was not something completely out of the book. Iran has had tense encounters at sea for years with the US Navy in the Persian Gulf and the Strait of Hormuz. But generally, the small Iranian, patrol boats used to sail away from the place after receiving warnings from the US warships. But this time, the president reacted firmly, and, for obvious reasons.

On the other hand, Iran is not to be coerced with the president’s warning. The leader of Iran’s Revolutionary Guard warned on Thursday that he has ordered his forces to potentially target the US Navy after President Trump’s tweet threatening to sink Iranian vessels. And in another show of defiance, the Guard on Wednesday launched Iran’s first military satellite, unveiling a previously secret space programme.

As a result, oil prices rallied-somewhat.

But this may not last long. Tensions in the Strait of Hormuz, the world’s number one shipping lane for crude oil, although still continue to play a role, yet its influence has dwindled.

When the Abqaiq oil facilities in Saudi Arabia was hit last September, triggering a 20pc price jump in the Brent crude, or the assassination of Iran’s top General Qassem Soleimani, which put the region on the brink of war, a spike was seen, yet it didn’t last long, wrote Tom Kool.

It may not be different now. A massive supply glut brought on by the pandemic, and a worldwide shortage of storage space has touched off a relentless rout that has shifted the entire forward curve for oil. This is not going to change overnight.

“The only way you’re going to balance this market is for prices to go to levels to get supplies to shut,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. said in an interview on Bloomberg Radio. “We’ve been calling for $10 Brent for a while, and we’ve absolutely looked at single-digit prices.”

There are signs that the stunningly low prices are here to stay as supply dwarfs consumption.

Royal Vopak NV, the world’s biggest independent storage company, was quoted in the press as saying that almost all of its space is sold, while Clarksons Platou said floating storage is filling at an “unprecedented pace.” Traditional oil bull Pierre Andurand warned crude could tumble below zero again and described the market as dangerous to trade-in.

In a ‘normal’ oil market, Trump’s tweet could have been a game-changer. Yet, in today’s woefully, oversupplied market, its bullish effect doesn’t appear to be lasting long.

Goldman Sachs is expecting “substantial volatility (in the crude markets) with more spikes to the downside until supply finally equals demand”.

Paul Sankey, managing director at Mizuho Securities, who had warned of negative oil prices a month ago, said that the WTI Crude futures prices could crash to as low as a negative $100 per barrel in May.

President Trump’s tweet may have distracted attention for a while, yet markets are faced with a dire scenario. Geopolitics could drive markets only to an extent. For the time being, fundamentals are in firm control. And the fact is: fundamentals continue to be very weak.

Published in Dawn, April 26th, 2020

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