Oil Continues to Climb amidst Tensions
Oil has made its’ most significant gains this year amidst the alleged Iranian bombing of two tankers and the takedown of a U.S. Air Force unmanned drone over the Gulf of Arabia. Oil futures climbed to peaks of 6.1% during Thursday trading last week in New York as US President Donald Trump warns the Islamic Republic that it has made “a very big mistake”.
The Strait of Hormuz is a narrow passage that a third of the world’s oil supply travels through, and with potential for conflict between the US and Iran, fears regarding the sanctity of the passage has been to blame for the recent run on oil prices. The latest escalation in the region has seen a U.S. unmanned drone shot down over the strait, which according to the United States was in international airspace when it was hit by an Iranian missile.
Iran stated that it shot down the unmanned drone as it was “spying”, stating it would defend its airspace and maritime boundaries “with all our might.” Trump appeared to downplay the elimination of the drone, saying that a “loose and stupid” individual, opposed to Irans top leaders, may have been at fault. Meanwhile, Iran-backed Houthi rebels in Yemen said they have hit a Saudi Arabian power plant with a cruise missile, at least the third such attack on the kingdom’s infrastructure in a week.
Resultant from the amassing of geopolitical conflict has been the volatility experienced in oil pricing, which has broken the recent ‘bear’ market the commodity has experienced. Oil prices hit a three-week high on Friday with West Texas Intermediate crude futures rising 45 cents, or 0.8% to $57.52 a barrel while Brent Crude futures – the benchmark outside the US – gained 84 cents (1.3%) to $65.29. WTI oil was ontrack for a weekly gains of nearly 10%, while Brent was up 5.3% from a week ago.
Among the global agenda affecting oil prices is the ongoing US-China trade talks which will in-part take place in the upcoming G-20 Conference in Osaka this week. Both leaders have domestic political pressure pulling them in opposite directions, with Trump attempting to fulfill an election promise and Xi Jingping attempting to maintain face and control amidst the Hong Kong protests. However, pressure is also sustained to end the trade war, as both economies are showing potential for recession, continuing the trend of a slowing global economy.
Bank of America Merrill Lynch projected oil demand growth for 2019 to be just below a million barrels per day, however noted that if trade negotiations were to fall-through they would have to revise their numbers lower. With even the slightest signs of positivity extended from Trump towards Xi – “very good” talk, “terrific president” – alone sending oil prices up sharply, the market looks towards the G20 for signs of a definitive outcome.
Another event showing market anticipation is the OPEC+ meeting in Vienna. The meeting shows less uncertainty than what will occur in the G20, with analysts expecting OPEC to stick to their forecasted production cuts or at most extend them with increased crude demand stemming from IMO 2020 regulations. Forecasts suggest that global demand will run ahead of global supply if OPEC output were to remain at current levels.
Most notably, the United States and Iranian relations will play a critical role in whether a new oil price-floor is set or whether it is just a brief stint of speculative uncertainty. However with the U.S. seemingly searching diplomatic routes in retaliation, military action has been considered, with Donald Trump’s last minute calling off of a bombing attack last week. President Trump is choosing to impose “major additional sanctions” to Iran which will continue to affect their already crippled economy after calling off the strikes, over concerns about the loss of life.
Trump’s administration is prepared to negotiate, and would be expected to discuss Iran’s nuclear program. Mike Pompeo said in a statement that “we will never allow them to obtain a nuclear weapon and we will not allow them to continue to sow violence across this region.”
In summary, looking ahead into the week, the G20 summit featuring US and China will be a major factor among others such as the OPEC+ meeting, and further developments regarding a US – Iran confrontation. Gains further in the week could be limited if traders decide to take the US-Iran military conflict premium off the table, at least for the time being.
By Sydney Robertson
Click here for a one month free trial to our Lotus Blue Portal.