Oil’s Geopolitical Risks to Outweigh Trade Concerns

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Oil’s Geopolitical Risks to Outweigh Trade Concerns

Oil prices have been progressively falling from six-month highs as trade concerns mount, with the United States’ promise to hike tariffs on Chinese imports seeming set to become a reality tonight. Both sides have been strengthening their position, and if a tariff war breaks out, oil may fall along with a worldwide crash in stocks and commodity currencies.

The trade war is increasing fears about global growth, which might undermine the demand side of the case for higher oil prices. If the discussions do not entirely collapse, oil markets may begin to concentrate on the geopolitical concerns posed by Iran, Russia, Venezuela, and Libya.

Iran

The escalation of tensions between the United States and Iran shows no signs of abating. The termination of US sanction exemptions at the beginning of the month puts more strain on Iran’s already fragile economy. President Trump opted to withdraw the United States from the historic nuclear agreement signed by President Obama a year ago. The US wants a deeper commitment from Iran to curb its nuclear goals, something Iran has no intention of doing.

If Iran takes action to close the Strait of Hormuz, which is a critical transit point for more than 20% of global seaborne crude-oil commerce, upside risks for oil prices might increase.

Russia

The poisoning of Russian oil in the Druzhba pipeline system last month is still unresolved. Although Russian oil quality has improved, European refiners are still unsatisfied. More than 92% of Russian Urals crude exported from Ust-Luga stays on board ships. This interruption might be rectified by May 11, but the impact of the three-week outage will still be seen in the oil markets.

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Venezuela

The Venezuelan situation is intensifying as the U.S.-backed Juan Guaido failed to oust President Maduro at the end of last month. The uprising is likely to continue, but the opposition appears far from securing the required military support. It seems that the situation will need to see protests intensify and Guaido win over more military backers before another attempt can be made. Venezuelan oil production is at high risk of falling some more in the coming months.

Libya

Libya’s civil war is likely to show no signs of slowing down as the Libyan National Army (LNA) could continue to press on overthrowing the UN-backed government. Libya’s oil is likely to see further disruptions and could see a lack of investment that would be detrimental to future growth. Oil revenues are down sharply, and that is putting continued pressure on the government.

WTI

West Texas Intermediate (WTI) crude remains vulnerable to the outcome of U.S.-China trade war and a potentially accelerated velocity in rising U.S. production levels. This week’s crude oil inventory release saw stockpiles fall by a near 4 million barrels, while analysts expected an increase of 1.2 million barrels. Oil rallied off the release, but the recent batch of releases has been mixed, with some weekly results posting some unexpected large supply increases.

On the daily WTI oil chart, important support is tentatively forming from the 23.6% Fibonacci retracement level, as well as the 50- and 200-day simple moving averages. If we do not see consecutive daily closes below $60.00, oil may continue to stabilize here. If the bearish trend continues, significant support will be found at $56.40.

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Loonie

If oil prices do manage to move higher, the Canadian currency may deliver a stronger bounce. The relationship between the loonie and oil prices has been broken since March, suggesting that the Canadian currency may be able to catch up here. Strong oil prices have historically been good for the Canadian economy since oil is one of Canada’s key exports.

Just before the US close, the OANDA order book indicator revealed that the proportion of open positions held by OANDA’s customers was 63.7% short and 36.3% long, with 0.6% of pending sell orders near the 1.3510 level.

OANDA

The material in this article is intended to be generic in nature and does not take into account a client’s specific circumstances. It is neither investment advice or a trading inducement. The examples given are only illustrative and may not represent actual pricing. Clients are entirely responsible for evaluating whether trading or a specific transaction is appropriate for them and obtaining expert advice.

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