Mount­ing ten­sions with Iran, China leave oil prices in flux

The Tribune (SLO) - - News - BY CATHY BUSSEWITZ AND MICHELLE CHAPMAN

NEW YORK

A rare mix of geopo­lit­i­cal ten­sions in the Mid­dle East and China is tug­ging oil prices in opposite direc­tions and cre­at­ing un­cer­tainty over where they might land.

De­te­ri­o­rat­ing trade talks be­tween the United States and China, the world’s two largest economies, are pos­ing a se­ri­ous threat to global eco­nomic growth and when­ever that growth sput­ters, de­mand for oil and gaso­line typ­i­cally craters.

But es­ca­lat­ing ten­sions in the Mid­dle East and else­where could threaten oil sup­ply, which could push the price of oil and gaso­line higher. In the past week, the United Arab Emi­rates has al­leged four oil tankers off its east coast were tar­geted in sab­o­tage at­tacks. At the same time, Saudi Ara­bia has ac­cused Iran of be­ing be­hind a drone at­tack that shut down a key oil pipe­line in the king­dom.

Mean­while, the U.S. has dis­patched war­ships and bombers to the re­gion to counter an al­leged threat from Iran, whose econ­omy is reel­ing from Pres­i­dent Don­ald Trump’s de­ci­sion last year to with­draw the U.S. from the 2015 nu­clear ac­cord and im­pose wide-reach­ing sanc­tions.

“Ten­sions are high, and I think the chance of fur­ther es­ca­la­tion is prob­a­bly pretty good as well,” said Ryan Fitz­mau­rice, en­ergy strate­gist at Rabobank. “If any of these is­sues flare up, prices could in­crease sharply…If you have a ma­jor at­tack on a Saudi production fa­cil­ity or Saudi tanker, we could see prices in­crease quite dra­mat­i­cally overnight.”

There al­ready were con­cerns about con­straints on oil sup­ply. Last month, Trump de­cided to im­pose sanc­tions on na­tions that were im­port­ing oil from Iran, tak­ing about 1 bil­lion bar­rels of oil off the market by some es­ti­mates. Production in Venezuela, once one of the world’s largest oil producers, has col­lapsed to onethird of its his­toric out­put amid a po­lit­i­cal cri­sis there.

“There are so many risks to sup­ply, it’s hard to list them,” said Amy My­ers Jaffe, se­nior fel­low at the Coun­cil for For­eign Re­la­tions. “I think the market’s un­der­valu­ing how big the risks are.”

In­deed, some ob­servers of the oil in­dus­try are also down­play­ing the sup­ply risk. While they are con­cerned that ma­jor oil production fa­cil­i­ties in Saudi Ara­bia could be tar­gets of fur­ther at­tacks, the coun­try has been strength­en­ing its oil in­fra­struc­ture, mak­ing those tar­gets very hard to hit, said Kevin Book, manag­ing direc­tor at Clearview En­ergy Part­ners.

“There are so many miss­ing bar­rels right now that a real de­struc­tive act would have a tremen­dous up­ward price pres­sure on crude, and yet those real de­struc­tive acts are re­ally dif­fi­cult, too,” Book said. “They’re big mil­i­tary op­er­a­tions and there’s a lot of coun­ter­mea­sures in place to pre­vent them.”

While Mid­dle East ten­sions could push oil and gaso­line prices higher, the trade war with China could pull prices back down. Last week, the Trump ad­min­is­tra­tion more than dou­bled tar­iffs on $200 bil­lion in Chi­nese imports and spelled out plans to tar­get the $300 bil­lion worth that aren’t al­ready fac­ing 25% taxes. It also la­beled tele­com equip­ment gi­ant Huawei a se­cu­rity risk and im­posed ex­port curbs on U.S. tech­nol­ogy sales to the com­pany. China re­tal­i­ated by rais­ing tar­iffs on $60 bil­lion in U.S. imports.

There have been signs that eco­nomic growth in China is slow­ing, which could mean less de­mand for oil from one of the world’s ma­jor con­sumers. Last year, car sales in China fell 10%, and in March oil de­mand de­clined for the first time since 2014, said Jim Burkhard, vice pres­i­dent for oil mar­kets at IHS Markit.

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