Oil price down for fourth week despite attacks on Gulf tankers
OIL prices ended the week lower despite the suspected attack on two tankers in the Gulf of Oman.
Brent crude spiked 4.5pc to almost $63 a barrel on Thursday – its biggest jump in five months – after the incident close to the Strait of Hormuz, a key transport artery in the Middle East, before falling back to about $61.31. The oil price benchmark settled up 70c at $62.01 yesterday, leaving it down around 1.3pc this week and recording its fourth weekly decline.
The fall came as the International Energy Agency (IEA) cut growth forecasts for global oil demand for the second consecutive month, citing concerns over the weakening economy and trade tensions. The agency said the trends would curtail demand, leaving growth at 1.2m barrels a day in 2019, down from a forecast 1.6m. For 2020, it expects growth of 1.4m barrels a day.
Surging shale production in the US was undermining efforts by Opec to cut production in an attempt to keep prices stable or higher, the IEA said. The US will contribute 90pc of this year’s 1.9m barrels a day rise in global supply. Fracking has unlocked massive reserves in America, causing production to double in the past seven years and making it virtually self-sufficient.
Opec members meet this month to discuss whether to continue a policy of cutting production.
In a separate report, the IEA predicted hydrogen will play a crucial role in reducing global greenhouse gas emissions, but said governments need to do more to support the industry. There are about 11,200 hydrogen-powered cars on the roads worldwide, but that number needs to increase to 2.5m by 2030.
The biggest application for hydrogen is in heavy industry, such as chemicals, long-haul transport, iron and steel. Switching to clean hydrogen would dramatically cut greenhouse gas emissions for these sectors.
The big challenge, according to the report’s authors, is generating “clean hydrogen” from non-fossil fuel sources. Hydrogen is almost entirely supplied from natural gas and coal, and emits 830m tonnes of carbon dioxide into the atmosphere annually.
That’s the equivalent of the annual carbon emissions of the UK and Indonesia combined.
Oil tankers ablaze in the Gulf of Oman and the US pointing the finger at Iran should be enough to send the price of the world’s most vital commodity skyrocketing. Instead, oil prices have barely budged. Traders are not buying into the theory that Tehran wants a war, but they are worried about demand.
Dated Brent assessed by S&P Global Platts – the world’s most important oil benchmark – spiked by over 4pc following the attacks on Thursday and traded briefly just above $62.5 per barrel. On the face of it, this modest rise doesn’t reflect the risk to almost a fifth of the world’s oil shipped through the Strait of Hormuz, a narrow 21-mile-wide channel separating Iran from the Arabian Peninsula.
“I see the limited reaction in the crude oil market as an indication of traders saying hang on a minute,” said Ole Hansen, head of commodity strategy at Saxo Bank. “If Iran did this it would be an open invitation to the US to step up its involvement and that should have sent the price much higher.”
To prove Hansen’s point, crude futures tumbled earlier in the week, with Brent falling below $60 per barrel for the first time since late January, after data showed a largerthan-expected increase in US crude oil inventories. The combination of rising stockpiles, tepid demand growth and fears of a slowing global economy has been enough to wipe $13 off the value of a barrel of Brent crude since May, despite the recent attacks on oil shipping and infrastructure in the Middle East.
Thursday’s attacks were described by US Secretary of State Mike Pompeo as “an unacceptable campaign of escalating tension by Iran”. The Islamic Republic has already been blamed for orchestrating clandestine attacks last month on tankers moored off the coast of Fujairah in the UAE. Tehran denies responsibility despite Iranian officials threatening to close down Hormuz in response to US sanctions preventing the regime from exporting oil.
“The situation on the ground presents an intensely significant risk to oil markets that could unfold this summer,” warned Helima Croft, global
head of commodities at RBC Capital Markets, in a research note following the attacks.
“While many market participants see the recent security incidents as business as usual for the region, we see an abundance of escalation risks in large part because the US sanctions are subjecting Iran to almost unprecedented economic pain.”
Instead of fretting about what could happen, traders have continued to focus their minds on the fundamentals of supply and demand.
US crude inventories climbed 2.21m barrels at the beginning of June to 485.47m barrels. America’s stockpiles of crude – excluding its strategic reserves – have added almost 50m barrels to their tanks since the end of the first quarter.
Meanwhile, crude production has increased by 1.4m barrels per day from a year ago, solidifying America’s positions as the world’s biggest producer ahead of Russia and Saudi Arabia, according to official data.
Forecasters are also toning down their oil market predictions. The International Energy Agency yesterday reduced its estimate for daily demand growth this year by 100,000 barrels to 1.2m barrels per day, signalling more bearish sentiment for crude. Opec itself has also warned of the impact a trade war between China and the US could have on oil markets. The cartel has revised down its own demand growth projections for the second half of the year.
“The pressure from lower demand
‘I see the limited reaction in the crude oil market as an indication of traders saying hang on a minute’
growth, confirmed by all three major forecasters this week and the counter seasonal rise in US crude stocks continues to weigh,” warned Saxo’s Hansen.
Given the facts, Opec has little choice but to extend its 1.2m barrels per day of production cuts and do everything necessary to hold its alliance together with Russia if it wants to boost prices. There is also an argument for even deeper cuts, but this would risk losing more market share to the US. However, the group is struggling to even agree a final date for its next policy setting meeting after Russia requested a timing change.
Of course, Iran’s leaders oppose any rescheduling of Opec meetings in the current environment. The Islamic Republic’s vital oil industry is already feeling the full impact of sanctions and has received little support from its partners in the Vienna-based group, which is dominated by Saudi Arabia.
Output last month plunged by almost 230,000 barrels per day to just under 2.2 million barrels per day after waivers allowing eight countries to buy Iranian crude expired.
Traders may believe Tehran’s denials that it is trying to provoke a war with the US by sticking limpet mines on tankers, but they cannot ignore it is playing with fire by mixing politics with oil. “The risk of miscalculation in the Middle East is clearly rising,” warns Paul Sheldon, chief geopolitical adviser at S&P Global Platts Analytics.