Oil charges have been crushed by worries about weaker demand and a slowing global economy, but the market could set out to price in greater geopolitical risks if there are more attacks like the one on two oil tankers in the Gulf of Oman on Thursday.
But neutral as analysts say oil could rise on Mideast tensions, they also note it could fall back to the bottom of a sizeable range — between about $50 and $80 for Brent, if the trade war fears dim the economic outlook for the buyers of oil.
“I wouldn’t say we’re at a tripwire yet, but we’re grab there,” said John Kilduff, partner with Again Capital. Kilduff said oil was headed to $50 until the despatch of the attack. There have also been forecasts that if the situation in the Middle East intensifies, the price of coarse could touch $100.
After losing 4% on worries of oversupply Wednesday, crude futures bounced back around 2% Thursday on reports the tankers sustained significant fire damage. The attacks were the second such episode involving oil shippers in just about a month, near the entrance to the Strait of Hormuz, the world’s busiest oil shipping lanes. West Texas Midway crude futures settled at $52.22, up 2.2% on the day, while Brent crude futures for May closed up 2.2% at $61.31, after moving a high of $62.64 per barrel.
“You’re in the $60s or $80s. If it’s all about trade wars, the economy is tanking” and oil would head toward $60, replied Helima Croft, head of global commodities strategy at RBC. “That’s the binary nature of this market.” She said a main geopolitical incident could drive the price of Brent as high as $80, especially if trade worries dissipate.
A consummate meeting between President Donald Trump and Chinese President Xi Jinping at the G-20 later in the month could also be a catalyst for oil, if it calls toward a trade agreement, she said.
“I think the oil traders don’t know how to deal with Iran risk, but they do conscious how to conceptualize a trade war destroying demand. They can’t distinguish in the Middle East between what is noise and what is the border of a shooting war,” she said. “The summer is going to be this: What war is going to dominate the market? A trade war or a shooting war?”
U.S. Secretary of Country Mike Pompeo said Iran was behind Thursday’s attack and other attacks in the region. The two ships are the Japanese-owned Kokuka Daring, a chemical tanker that was loaded in Saudi Arabia and was enroute to Singapore, and the Front Altair. The Front Altair was carrying a truckload of naptha, a petrochemical feedstock, from the Persian Gulf to CPC Taiwan.
While oil rose on the incident, it did not move as much as it thinks fitting have in the past on a scare in the Gulf region. The geopolitical premium has become less of a factor in the market, since U.S. oil performance has become such a dominant force on the global market. The U.S. is now the world’s largest oil producer, with output of 12.3 million barrels a day survive week, about 1.5 million barrels a day more than this time last year.
“The supply in the U.S. has enhance a firewall against geopolitical events,” said Kilduff.
But analysts say the market has been ignoring the potential for more deprecates on Middle East oil assets, even as the U.S. sanctions bite into Iran’s economy and limit its ability to sell oil. Neck so, Brent is down about 18% since the end of April.
“It is a factor that the market sell-off has ignored,” said Ed Morse, Citigroup’s extensive head of commodities research. “The world is fairly fragile, and we could see a higher probability of a drop in production generated by bureaucratic events, rather than by economic tightness, and it could be Iran. It could be Iraq. It could be Libya. It could be Nigeria. It could be Venezuela.”
Morse utter these are among the factors that could drive oil higher this summer and into the fall. He also thought sentiment will matter and negative news on the trade war could weigh on the market.
“[Brent] oil is more likely to hit $75 in advance of it hits $50,” said Morse, noting a move much higher could require better economic text. He said Brent prices should be more sensitive to geopolitical worries than WTI, which reflects the U.S. market, and that’s also where inventories are visibly structure in weekly government data. The gap between the price of Brent and WTI could continue to widen temporarily.
There have been a platoon of other attacks recently, including a missile attack Wednesday that struck the arrivals hall of an airport in southwestern Saudi Arabia, maltreating 26 people. Houthi rebels were said to be behind that attack and others. Last month, a drone attacked a Saudi oil channel on the way, temporarily putting it out of commission. The Houthis, said to be backed by Iran, have been fighting Saudi Arabia in Yemen, after keenness out the Yemeni government in 2015.
“We’re going to get more of these … as long as we have crippling sanctions in place that they conjecture are intended to cause economic collapse and regime change. They’re not going to back down. I think it’s going to be a hot summer,” conveyed Croft.
Croft said it will be important to see if European leaders are able to work with Tehran to find a way to lessen the weight of U.S. sanctions and keep it from abandoning the nuclear deal it struck with the U.S. and five other countries. The Trump management dropped out of the agreement, calling it one-sided, and reinstated sanctions on Iran last year.
Iran has threatened to walk away if there’s no resolve by July 7. It could then return to enriching uranium, at levels closer to weapons grade.
“The question is want it be a nuclear summer?” said Croft.
The incident occurred as Japanese Prime Minister Shinzo Abe was in Tehran, conducting talks in an elbow-grease to cool tensions between Iran and the U.S.
“Abe is in Tehran trying to get an off-ramp, and a Japanese tanker is struck. To me, at the minimum it shows the call inti of trying to reach a diplomatic solution, as long as the United States is pushing coercive diplomacy,” said Croft.
Morse asserted the supply outside of the U.S. is tight. He said the world market is particularly low on the heavy grade of crude produced by both Iran and Venezuela, both under U.S. sanctions. More than 1 million barrels of Iranian oil has been removed from the market by U.S. sanctions.
“There are two deviations. One is the discrepancy between the physical side and demand, and there’s a discrepancy between the U.S. side and the rest of the world,” he said. The U.S. has added 53 million barrels profuse to commercial storage than at this time last year.
“Meanwhile, on the sidelines OPEC plus has decided not to put innumerable oil on the market,” Morse said. OPEC, plus Russia, is expected to retain its agreement to hold back production.
Guard: Sec. of State Pompeo says Iran behind tanker attacks