FRIDAY, March 29, 2024
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Geopolitics, tariffs may give a bruise

Geopolitics, tariffs may give a bruise

A unanimous voice that has emerged in oil markets is that stocks are getting tighter against a backdrop of rising demand. This has led to oil firmly holding on to its recent gains despite a spate of geopolitical hiccups.

A trade spat between the US and China and a reshuffle in key US government positions that could influence Washington’s relations with Iran have raised a key question: Can these developments cloud improving oil market fundamentals?
 For now, a cocktail of trade turmoil and political turbulence may keep oil markets on tenterhooks, but may do little to upset the supply-demand rebalancing process. However, a long-drawn diplomatic row could adversely impact prices, as well as demand - both directly and indirectly.
 The International Energy Agency expects supply to undershoot demand from the second quarter on the back of flat Opec production and Opec also sees the oil storage glut shrinking, with commercial inventories held by OECD countries easing in February, from January levels.
 This supply-side outlook coupled with upward revisions to demand forecasts helped Dated Brent to average close to $66/barrel in March, a price level that the market saw at the beginning of this year.
 The IEA raised its estimate for global oil demand growth for 2018 to 1.5 million barrel/day in its March oil market outlook report, from 1.4 million b/d in the previous month. It expects stronger than previously expected growth in the OECD, particularly Europe, including Turkey, as well as in the US and Japan. It also highlighted that demand in China and India looked promising at the beginning of the year.
 Positive news has also emerged on the demand side for oil products.
 US gasoline demand nearly touched an all-time high for the second week of March, according to the Energy Information Administration. In the week ended March 16, US product supplied, a demand proxy, averaged 9.32 million b/d, the second strongest figure for that week at least as far back as 2000.
 According to S&P Global Platts Analytics, global oil demand is expected to grow by about 2 million b/d in 2018, up marginally from 2017 levels. Apart from China and other less developed countries, demand is also expected to rise in the US because robust shale oil output has prompted new petrochemical plants to lift demand for feedstock.
According to the IEA, oil stocks in OECD countries rose in January, the first month-on-month rise since last July. However, the January increase of 18 million barrels, was half the average for the month over the past five years.
Opec said commercial oil inventories held by OECD countries fell to 2.855 billion barrels in February, from 2.865 billion barrels in January.
 Opec and its allies in a production cut agreement that aims to reduce 1.8 million b/d in supplies through the end of 2018, have said that they are aiming to reduce OECD commercial stocks to a five-year average.
 But if there was one market factor that was bearish for fundamentals, it was the news about rising US production.
 The US oil and gas rig count climbed to three-year highs on March 23. With an estimated 995 rigs deployed in US shale plays, the count in that week was the highest since April 2015, data from Baker Hughes showed.
But what the market needs to closely watch is any aggressive turn in US foreign policy towards Iran led by incoming secretary of state Mike Pompeo that could possibly trigger a loss of more than 1 million b/d in global crude supplies by the end of 2018.
Pompeo, the CIA director whom President Donald Trump picked to replace Rex Tillerson as secretary of state, is expected to push for the US to exit the Iran nuclear deal and for new sanctions on Venezuela's oil sector. Market commentators expect Pompeo's policy to be far more hawkish than Tillerson's.
In addition, Trump's decision to name John R. Bolton as his new national security adviser has also led analysts to believe that it had greatly increased the likelihood of a US exit from the Iran nuclear deal.
Tensions in the Middle East have also mounted after Saudi air defenses intercepted and destroyed ballistic missiles fired from Yemen towards various targets in Saudi Arabia, keeping oil markets on tenterhooks.
Another factor the market cannot afford to ignore is the possibility of an escalation in the US-China trade spat after Trump recently announced a 25% tariff on Chinese imports. The trade row has threatened to derail the recovery in global commodity markets by curbing trade flows.
So far there has been no direct impact on oil. But an escalating US-China trade war could not only hurt container shipping and bunkers fuels, but could slowdown overall trade volumes and GDP growth, which could indirectly impact oil demand.

Contributed by SAMBIT MOHANTY, Senior Editor, Asia Oil News & Analysis, S&P Global Platts 
 

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