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April
11
2018

Oil Prices Likely To Soar On Geopolitical Risk
Nick Cunningham

Brent crude prices rebounded to $70 per barrel during midday trading on Tuesday as fears of a trade war eased on conciliatory comments from both the U.S. and China. That allowed the prospect of geopolitical uncertainty to reemerge as a driver of oil prices.

Even as President Trump mulls $100 billion in additional tariffs on China, as reported last week, U.S. officials took to the airwaves over the weekend to downplay the significance of the trade dispute. Trump’s trade adviser Peter Navarro, considered one of the main voices pushing for stiff tariffs, sounded more low-key (for him) on the Sunday talk shows. “We’re listening to the Chinese. We’re willing to work with them,” Navarro said on NBC News’s “Meet the Press.” Although he went on to add: “But we’re clear-eyed about this. We’re moving forward on a measured way with tariffs, with investment restrictions,” he said. “What we want from China is very clear. We want fair and reciprocal trade.”

Secretary of Treasury Steven Mnuchin was more measured. “Whatever happens in trade, I don’t expect it to have a meaningful impact on our economy,” he said.

Chinese President XI Jinping also said on Tuesday that he would continue to lead to an opening of China’s economy, which would also result in lower import tariffs. His tone was widely interpreted as an attempt to tamp down the flames of a trade war with Washington.

As such, fears of a trade war have once again declined, although given the impulsive decision-making by the White House, that could obviously change at any moment. “It's not so much 'risk on/risk off', as it is 'trade war on/trade war off' and, at the moment, we're 'trade-war off',” Jasper Lawler of London Capital Group, told Reuters.

The lessening of trade concerns as a drag on oil prices allowed geopolitical risk to reemerge, pushing up oil prices at the start of the week. Brent crude jumped to $70 per barrel, having gained nearly 5 percent over two trading days.

There is no shortage of risk to supply, and if U.S.-China negotiations succeed in heading off a brutal trade war, oil could be heading much higher.

That is because there are several points of crisis that could crop up just in the next few weeks alone. First, Venezuela’s oil production continues to melt down, resulting in concrete losses to global oil supplies. Output fell by another 100,000 bpd in March, dipping to just 1.51 million barrels per day.

The declines are expected to continue but could be made much worse if the U.S. decides to impose sanctions on Venezuela and/or state-owned oil company PDVSA. Venezuela’s President is planning on holding a sham election in May, which could spark retaliation from Washington. Sanctions – whether on Venezuelan imports to the U.S. or on U.S. diluent heading to Venezuela – threaten to accelerate the declines underway in the South American nation.

A second geopolitical flashpoint that could reignite is the U.S. confrontation with Iran. President Trump needs to decide a course of action by May 12, and all signspoint to a withdrawal from the Iran nuclear deal, and the potential re-implementation of U.S. sanctions. That could result in the loss of perhaps 500,000 bpd within 12 months.

In the short-term, U.S. military action in Syria could add upward momentum to oil prices. Oil markets tend to trade oil higher when missiles are launched in Middle Eastern countries. The price effect should be temporary, however, as Syria is only a marginal producer of oil. The impact on oil should be minimal to nil, assuming the conflict does not suck in U.S. forces into a protracted conflict that could very well escalate into a U.S.-Iran proxy war.

Meanwhile, Saudi Arabia is rumored to be targeting $80 oil, with an eye on the Aramco IPO. While that is unlikely to be official policy, it suggests that the Saudis won’t necessarily step in with more supplies in the event of an outage. Without that supply backstop, the market could tighten and force prices up, which would work to the benefit of Riyadh.

The backdrop of a tightening oil market is the crucial thing to remember he  re. There has been the occasional outage in the last few years (Libya, Nigeria, Canadian wildfires, hurricanes, the OPEC cuts, etc.), but the difference today is that the inventory surplus has nearly been eliminated. OECD inventories fell to just 53 million barrels above the five-year average in January, down from more than 300 million barrels a year earlier.

In the next few months that surplus will likely disappear altogether. And that is even before we account for unexpected geopolitical disruptions, which means any unforeseen event that affects supply could significantly push up oil prices.

By Nick Cunningham of Oilprice.com

 

 

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

 

 

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