Mounting tensions with Iran, China leave oil prices in flux
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.