Trump sparks oil rally with Iran spat
LONDON (Bloomberg) -- Just over a week ago, crude prices were surging as attacks on Saudi Arabia’s oil tankers and pipeline network spurred fears that the Middle East was on the brink of military confrontation.
In the past two days, however, oil has suffered its biggest losses this year as those concerns are shunted aside by another type of conflict: the escalating trade war between the U.S. and China.
At the heart of both price moves is the foreign and economic policy of Donald Trump. In the former case, political tensions are flaring as the U.S. president puts a diplomatic squeeze on Iran and presses its rivals in Riyadh to keep oil markets well-supplied. In the latter, it’s Trump’s trade battle with China that’s now weighing on the outlook for the world economy and oil demand.
“Once again, Trump proves that he is the most disruptive force in the oil markets,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC in New York.
Crude futures climbed to a two-week high of $63.48/bbl in New York on May 16 after Saudi Arabia, the biggest producer in the OPEC cartel, announced that two oil tankers had been attacked and accused its political nemesis, Iran, of ordering a drone strike that hobbled a critical pipeline.
Tensions had already been increasing in the region after Trump tightened his grip on Iran at the start of the month, threatening any country that buys crude from the Islamic Republic with sanctions. Trump has been pressuring Iran since quitting an accord on the country’s nuclear program last summer.
Oil prices continued to rise on Monday after the Saudis signaled at a weekend meeting that the Organization of Petroleum Exporting Countries will likely keep a lid on supplies until the sanctions on Iran begin to bite.
Growth fears
But by the middle of the week, Trump’s blacklisting of Chinese telecommunications giant Huawei Technologies Co. signaled that the 16-month dispute with Beijing over trade had escalated to a new level. Global equities tumbled, and worries that economic growth and fuel demand will be hit superseded the earlier preoccupation with Middle East hostilities.
Fears of a recession flared on Thursday, spurring investors to ditch risky assets for the refuge of gold and bonds, sending yields on 10-year Treasuries to the lowest since 2017. Oil prices tumbled 5.7%, bringing their slump over two days to 8.3%, the steepest since mid-December.
“Economic uncertainty is what is driving the steep decline in price as the consequences of U.S.-China trade tensions lead to another wave of de-risking” by investors, said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London.
Concerns over global oil demand had already been percolating long before this week’s alarms.
Last week, the International Energy Agency trimmed its forecasts for 2019 demand growth for the first time since October amid projections that the world economy will expand at the weakest pace in a decade. Oil consumption will increase by 1.3% this year, a rate the agency still considers “healthy.”
Saudi Energy Minister Khalid Al-Falih, speaking at the gathering of OPEC nations and their allies at the weekend, pointed to slowing growth and trade concerns as key reasons why they won’t rush to open the taps despite looming supply risks. The group will meet again in the coming weeks to formalize policy for the second half of the year, once again testing Trump’s influence on oil markets.
Although the Saudis and their partners have indicated that they’re determined to keep supplies tight, Trump tweeted in April that the kingdom had pledged to fill in any gap caused by his crackdown on Iran.
Last year, the Saudis bowed to pressure from the U.S. to maximize production on the understanding that American sanctions would completely cut off Iranian exports, only to see prices crash in the fourth quarter when the crackdown was diluted.
Physical market
Despite this week’s plunge in oil prices, crude markets continue to signal that the kingdom and its partners may need to increase production. Besides the squeeze on Iranian exports, oil refiners face challenges to securing barrels that include the economic meltdown in Venezuela, unrest in Libya and contaminated supplies from Russia.
Even as Brent crude futures for July settlement slumped on Thursday, the premium for July versus contracts two months hence jumped -- by 18% to $2.20/bbl -- suggesting that traders remain nervous about barrels becoming scarce in the short term.
“Although the less rosy macro picture linked to a worsening of the trade tensions is a broad bearish backdrop these days, we believe the downside move is still not reflective of the fundamentals,” said Citigroup Inc. analysts Ed Morse and Francesco Martoccia.
