Insiders talk in code about Trump
Factors that make the price trajectory uncertain are all linked to president
Uncertainty was the buzzword at the crude oil industry’s annual gathering in Asia, but virtually everybody was reluctant to talk about the root cause behind the sector’s discomfort: US President Donald Trump.
Uncertainty was the buzzword at the crude oil industry’s annual gathering in Asia, but virtually everybody was reluctant to talk about the root cause behind the sector’s discomfort: US President Donald Trump.
Speaker after speaker at this week’s Asia-Pacific Petroleum Conference (Appec) highlighted the challenges to the crude oil industry, from supply issues around Iran and Venezuela to the mounting risk of global economic slowdown. But even in private conversations, hardly anybody was keen to talk about what all the risks to the oil sector have in common, namely the mercurial US president.
The drop in supplies from Iran and Venezuela is the result of Trump imposing sanctions on both countries in an attempt so far unsuccessful to get their leaders to bend to US demands. Meanwhile the threat to global growth from the trade dispute between the US and China was triggered by Trump’s policies.
In some ways it does not matter whether you think Trump’s actions are justified or flawed, as long as you recognise that they are having real impacts on global oil markets.
Hence the overuse of the word “uncertainty”: oil industry insiders are reluctant to acknowledge the role of US policy in the market dynamics, and even if they do recognise the issue in private, they will not talk about it in public.
In some ways Trump is to the industry what the nefarious Lord Voldemort character is to the Harry Potter series of books: “he who must not be named”.
Oil industry executives, analysts and traders generally have a view as to where they think crude prices are headed and why this is the case. But they are struggling because they have learnt that Trump is an unpredictable actor.
At the Appec event last year, the consensus was that crude prices were heading higher, with this view based on the output cuts instituted by Opec and allied producers such as Russia, as well as pricesupportive geopolitics.
The industry anticipated that Trump would reimpose sanctions on Iran’s oil industry and expected the loss of Iranian cargoes to boost prices. But they also incorrectly assumed that the trade dispute would be resolved, because it was in the interests of both the US and China to do so.
This meant that while there was uncertainty at last year’s Appec, it was bullish uncertainty, and people were more open to expressing the view that prices would rise.
However, when industry leaders talk about uncertainty today, what they really mean is that they think crude prices are heading lower. But they do not want to say that openly.
This is understandable, as oil producers or traders seldom want to talk down the market, just as they do not want to be seen as talking about politics, even though politics is driving the market.
The industry has correctly identified that prices are in a tug-of-war between supply disruptions and the darkening outlook for global growth.
The conclusion is that the economic clouds are winning that battle so far and therefore crude prices are more likely to fall than rally. This is despite most bottom-up analysis of the crude market based on supply and demand fundamentals pointing to higher prices, at least for the rest of 2019.
Insiders are also aware that the entire market can turn on a few tweets from Trump, and the possibility of US rapprochements with Iran and China cannot be ruled out.
The dismissal of hawkish US national security adviser John Bolton on Tuesday is a case in point.
The dilemma for the oil market is that if Trump were to somehow settle all the disputes he has initiated, the outcome for crude is still uncertain. Allowing Iranian and Venezuelan barrels back on the market is bearish for prices; reaching a trade deal with China is bullish.
It is possible that all the disputes could be resolved, or just one, or none at all. But the one key factor linking all of them is Trump and he is the one thing nobody wants to talk about.