Trump's trade war may have reduced oil prices at the beginning of the week, but the US's decision to send warships to the Middle East is an unfortunate sign of potential escalation in conflict with Iran. The oil market looked on Monday when traders tried to balance these two sources of instability.
U.S. National Security Adviser John Bolton said the United States sent an airline battle group and a bomb mission to the Middle East to send a message to Iran that any attack on US interests would be met with "unrelenting force." Bolton has always had a particularly hawkish attitude towards Iran, and reported rattled the national security operations months ago when he requested that they prepare plans for a military strike.
The American decision to send warships to the Middle East must be seen in this context. Bolton, who may be frustrated by his struggling government campaign in Venezuela, has turned his sights back to Iran, a perennial obsession with his.
The move comes just a week after the deadline for expiry of sanctions has ended, and the US aims to cut Iranian oil exports to zero. Trump also looks at other non-oil sanctions as a way to push Iran.
The increase in oil prices so far this year has been a supply-driven phenomenon, with OPEC + taking 2.2 million barrels per day (mb / d) offline, a figure that includes involuntary outbreaks in Iran and Venezuela, according to Bank of America Merrill Lynch . "Iran's red exports fell from a high of nearly 2.5m b / d to a low of around 600kb / d in December, before returning this year," the investment bank wrote in a May 3 note. "As sanctions deviate from expiring in May, we expect further pressure on Iran's exports and foresee that volumes will fall below 500k b / d in 2H1[ads1]9, and may even reach zero, depending on how cautious buyers have sanctions." Related: Nigeria Shuts In More Oil After Protests in Niger Delta
Overall global supply failure is now at a multi-decade high of 4 mb / d, the bank said. Historically, every 1 mb / d turn in supply balances equals about $ 17 a barrel move in oil prices, the investment bank said.
Although spot and short term forward prices have risen significantly this year, longer dated futures have only moved modestly. As Bank of America notes, spot prices are up $ 20 a barrel from December, but three-year futures prices are just up $ 6. This makes it harder for US shale drilling to secure future production, making production more difficult. In other words, the slate response can be more modest than most people think, at least until the rear end of the futures curve rises.
It also means that OPEC + has been awarded a "very good hand" as the Bank of America puts it. There is less fear that the restraining production will stimulate a massive slate response, at least much larger from today's already high levels. Moreover, because Saudi Arabia needs higher oil prices to balance its books – Bank of America puts its fiscal breakeven price at around $ 93 a barrel this year – Riyadh will move slowly to bring production back online. Bank of America puts the Brent floor price at around $ 70 a barrel. Related: China set to fight US sanctions on Iran
The US occupation with Iran puts further upward pressure on crude oil, and the move of warships closer to Iran is worrying. The trick, from the Trump administration's perspective, is how to escalate conflict with Iran (and Venezuela, for that matter) without sending the oil price sharply. High prices are a domestic policy threat.
Judging by the reaction of the oil markets on Monday – a little down during dinner trade, but up later in the afternoon – Trump may have found the solution to this difficulty. He hit the trade war with China while his administration increased the conflict with Iran. Normally, fear of conflict in the Middle East would increase prices. But these concerns were clearly offset by the perceived pitfalls of the world economy from Trump's trade war. So, it seems, Trump can have its conflict in Iran and keep oil prices at bay at the same time. It can only cost us global economic stability.
By Nick Cunningham from Oilprice.com
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