Five events will decide oil prices, not Trump
US President Donald Trump looks increasingly toothless when it comes to oil markets. Despite ranting on Twitter about Opec’s alleged market rigging, the leader of the world’s largest consumer of crude has been ineffective in damping down the cost of a barrel.
Five key events could determine where prices, currently around $80 per barrel, head over the next year and Trump’s tweets are not among them.
Firstly, Opec’s power brokers and their allies led by Russia are gathering in Algeria this weekend. The group agreed in June to raise their collective production by one million barrels per day but are still to define how these extra barrels will be distributed. Saudi and Russia will provide most of this additional crude.
Just days before oil ministers were due to land in Algiers, Trump tweeted: “We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The Opec monopoly must get prices down now!”
However, the Algerian meeting was already clouded in political acrimony. Iran’s oil minister Bijan Zanganeh had cancelled his ticket to North Africa and threatened to “veto” attempts by other Opec members to seize its market share once US sanctions choke off the supply of its crude to international markets in November.
Iran fears its main regional rival, Saudi Arabia, is conspiring with its Arab allies in the group to forge a new coalition with Moscow. Which brings us to the full reintroduction of US economic sanctions against Iran due to kick in from Nov 4. S&P Global Platts Analytics forecasts Iranian daily output could fall by 1.4 million barrels.
“The US administration has made it explicit that its intended aim is to reduce exports to zero and will sanction those who do not reduce imports from Iran,” HSBC’S oil and gas research team cautioned this month as the bank warned a spike in prices to $100 per barrel is a risk. “We expect strong compliance from key US allies, with the greatest uncertainty probably concerning the response from China, India and Turkey among others.”
However, just days after the Iran sanctions come into force, oil markets will have to absorb the outcome of midterm elections in the US on November 6. Higher gasoline prices have delivered the political kiss of death to the hopes of many American presidents and Trump is unlikely to be an exception given all the other challenges his administration faces. If Democrats win control of the House of Representatives, or the Senate, it could paralyse Trump’s two years in office before the next presidential elections.
Although the outcome isn’t expected to slow the performance of America’s record-breaking oil and gas industry, it could make it harder for Trump to meddle in the Middle East and prevent the president from further escalating his trade war with China.
Fourthly, there is the “Neutral Zone” issue. The area of oilfields between Saudi Arabia and Kuwait has been left dormant since 2014 but it may now hold the key to keeping markets well supplied once Iran’s shipments are blocked. It contains two giant fields with capacity to produce 500,000 b/d. These could be restarted in December after the Gulf states managed to settle any political differences over the area. If the oil market is to absorb supply shocks, which could come from troubled producers such as Libya and Venezuela, a lot of that crude may come from the border zone created when maps were redrawn in 1922.
Finally, there is the introduction of new regulations on fuel used for shipping, known as IMO 2020. Imposed by the London-based International Maritime Organisation, they are designed to cut the level of sulphur in marine fuels to 0.5pc could have a $1 trillion impact on the global economy over the next five years.
According to Platts Analytics, the requirement to provide cleaner fuel for the world’s shipping fleets could add an average $7 per barrel to baseline estimates for the price of Brent crude by the end of the decade.
All of these factors present fundamental challenges for oil markets to absorb, unlike Trump’s tweets.
‘The US has made it explicit that its aim is to reduce [Iran] exports to zero’