After trade oil is the next battleground

The US’ pressure on Saudi Arabia to step up its output to offset Iran’s production means that after trade oil is the next battle ground.

But Trump will find reducing and stabilising oil prices is not as straight forward as he hopes.

For example, production outages and a strong dollar could conspire against Trump.

Iran trade sanctions

In May Trump announced the US was pulling out of the Joint Comprehensive Plan of Action (JCPOA) agreement. He complained the deal was flawed and failed to address Iran’s ballistic missile programme.

Iranian president Rouhani
Rouhani responds to US pull out from nuclear deal

 

Part of Trump’s campaign to pressurise Iran is to shut off exports of its oil.

Iran is a major supplier of oil to India, China, South Korea and Japan.

It’s these markets that the US has targeted. They’ve demanded they find alternate sources to Iran or face sanctions themselves.

However, replacing Iran’s 2.28 million barrels a day exports will not be a trivial task.

Trump pressures the Saudis

Trump asked Saudi Arabia to up production and complained about high prices in a tweet:

“…because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!”

However, Saudi Arabia wants to stabilise prices around $75. It needs higher prices to maintain government budgets and revive its fading hopes for its Aramco IPO.

But Putin at this year’s International Economic Forum said Russia was, “..perfectly happy with $60 a barrel”:

Outages and regional tensions

The best laid plans are usually thwarted on contact with reality. In this case, production outages, bottle necks and regional tensions.

This year Nigeria’s output was hit by pipeline shutdowns. A Canadian oil sands facility was shut down in June for nearly a month.

Regional tensions also have an impact. Iranian President Hassan Rouhani’s reference to the Hormuz Straits  was enough to cause market jitters and push prices up.

 

Downward pressures

There are downward pressures on prices apart from the obvious one of increased supply.

Brent falls on tariffs announcement 11 July
Brent falls on tariffs announcement

 

On the announcement of tariffs on a further $200 billion of Chinese imports Brent dropped up to $1.

Interest rate rises and the dollar’s safe haven status have added further pressure on oil prices.

The IMF has warned that economic growth is under threat from trades wars. It follows that this would also have a negative impact on oil prices.

Prices volatile side of high

The U.S Energy Information Administration warned that in spite of supply increases from non OPEC producers:

“…low spare capacity among members of the Organization of the Petroleum Exporting Countries (OPEC) create conditions for possible price increases if additional supply disruptions occur or if forecast supply growth does not materialize.”

 

Inventories are still relatively low and underlying demand still strong. Any problems to supply can cause sudden price fluctuations.

Despite his best efforts, Trump may find in the short term prices stay on the volatile side of high….

 

Gary Hollands

Geopolitical analyst Tyga FX