May 21, 2019, | SQUARED DIRECT - Oil prices this year rose significantly but the situation of the oil market today is volatile. New tensions in the Middle-East with the US and Iran together with a feeling of dread over the aftermath of the US-China trade war are both affecting oil prices causing them to bounce up and down: Iran tensions have pushed oil prices upwards, but fear of trade-war outcome risks have been pushing them down again. Which price direction will prevail is unknown and hard to predict since there are other serious factors to consider when it comes to global oil production and supply.
Rising global tensions and the oil market
With Iran, the US is trying to escalate the situation and seems set on inflicting “maximum pressure”, however, Donald Trump stated that he does not seek a war even though the US is now very close to armed conflict with Iran. It seems that Trump’s recent withdrawal from the Nuclear Deal with Iran coupled with sanctions on Iranian oil and other commodity exports, which caused serious disruption, were pre-planned moves to pile up more pressure on Iran to provoke a reaction. Iran has been exporting oil despite U.S sanctions and the US announced a strike group will enter the region because Iran recently threatened that it would close the straits of Hormuz, the ‘oil gate’ from where 17,5 million barrels, a fifth of the world’s crude, pass through every day.
Meanwhile, the US-China Trade War is also influencing oil prices. Weaker industrial output in China, Germany and the U.S is behind diminished global oil demand. Merrill Lynch of Bank of America said that global oil demand has decelerated sharply in recent months “averaging just 680k b/d in the past two quarters compared to trend demand growth of 1.46mn b/d in the past 5 years.” Tariffs have taken their toll on the global economy in general.
Other major issues affecting global oil production and supply
Venezuela, an OPEC member, is currently undergoing one of the biggest financial and humanitarian crises of the 21st century bringing much political turmoil and uncertainty in global oil markets. Also heavily sanctioned by the US, Venezuelan oil production is in serious trouble due to years of bad management and no investment, affecting global oil supply. Despite owning the biggest oil reserves in the world, Venezuela is now producing less oil than three of its neighbours, Colombia, Brazil and Mexico.
Libya, another OPEC member is suffering from ongoing internal clashes with no sign of ceasefire or resolution. The Libyan National Army has fallen into a stalemate and this could cause the next oil outage according to some analysts. Libya holds the largest oil reserves in Africa and according to Mustafa Sanalla, head of Libya’s National Oil Corporation, said that the country, which is currently producing 1.3mn barrels per day could lose up to a staggering 95% of its oil production. If something like this happens then it will affect global oil supply and oil prices.
On the 12th of this month, two Saudi oil tankers and two other commercial ships were sabotaged in the Gulf of Oman near the territorial waters of the United Arab Emirates, and on the 14th two of Saudi Aramco’s pumping stations were attacked by drones. The UAE claims Iran is behind the attacks. While these events did not cause any disruptions in Saudi oil production they further demonstrate the rising tensions directly correlated to oil production and supply which is causing great uncertainty and instability in the markets. The International Energy Agency has warned that this supply uncertainty could eventually lead to oil shortages.
OPEC+ appears resolved to mitigate the situation by increasing oil production for the rest of 2019 but taking everything into consideration it seems that oil prices will continue to bounce, despite having risen by more than 30 percent this year, because of the volatile pressure and instability that rising global tensions bring and of fears that a similar price crash to the one experienced recently in 2018 could happen again.
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