It’s one of the most incredible times in oil politics. At least five nations have the opportunity for oil market brinksmanship. Yet, only one is playing it to the hilt: Iran.
Tehran has shown how slick it has become in playing the game by taking the lead in striking a conciliatory note with incoming British Prime Minister Boris Johnson and expecting him to fall in line, despite the ongoing tanker hostage saga between the two countries.
And the United States, despite the might of its sanctions against Iran, still seems far from achieving its desired ends with the Islamic Republic.
Seldom has the Persian Gulf seen such heightened tensions for oil, and so little and inconsistent risk premium for the flat price of crude.
It should have dawned on almost every oil trader by now, regardless of the person’s directional bias, that none of the players in this geopolitics game – be it the U.S., the U.K., Saudi Arabia, the United Arab Emirates or even Iran itself – wants a real war on its hands.
That, alongside persistent worries about demand, has made this market work more for the bears than the bulls.
Geopolitics Are Just Not Cutting It For Oil Bulls
Since the U.S. decided to double down on sanctions against Iran, crude prices have barely performed to the expectations of those playing the long game in oil.
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U.S. West Texas Intermediate crude fell more than 16% in May, then rose about 9% in June and is down again 2% for this month. Brent, the benchmark for crude outside of the U.S., lost 11% in May, rebounded 3% in June and is looking at a near 4% decline in July.
But is demand for oil really that worrisome?
That’s another question that’s perplexing in itself.
Because if one were to look at U.S. crude stockpile draws of the past five weeks, the argument of floundering demand can barely stand.
Some 30 million barrels have been removed from U.S. crude inventories since the week ended June 14, almost double to expectations. It has been the longest streak of drawdowns since the November 2017-January 2018 period, when crude stockpiles fell without stop for 10 straight weeks.
As the market awaits the U.S. Energy Information Administration’s release of latest inventory numbers for the week ended July 19 – due at 10:30 AM ET (14:30 GMT) today – expectations are high for another substantial draw. While analysts forecast a decline of 4 million barrels this time, the American Petroleum Institute, in an inventory snapshot ahead of the EIA, reported a staggering drop of 11 million barrels.
But the API’s numbers may have been distorted by production anomalies related to Hurricane Barry, which forced the shutdown of more than half of the regular output on the U.S. Gulf of Mexico for at least two days before the storm made its Louisiana landfall on July 13.
Global Picture Hardly Looks Endearing For Oil
From a global perspective, U.S. crude draws get lost in the bearish picture painted by the Paris-based International Energy Agency. The agency revised down its 2019 global oil demand growth forecast to 1.1 million barrels per day (bpd) last week – the second time in a year after an earlier cut from 1.5 million bpd to 1.2 million. Fatih Birol, executive director at the agency, said another cut may be necessary before the year is out, especially if global growth led by China shows further weakness.
Global oil consumption has stalled since the middle of 2018, making lower oil prices inevitable despite the best efforts of Saudi Arabia and its allies to reduce production, Reuters oil columnist John Kemp said on Tuesday.
But of course, the China story itself might turn out to be better than thought, with the jury still out on whether stimulus planned by Beijing will help the world’s second largest economy override the worst of its trade war with the United States.
U.S. Crude Draws May Remains The Best Hope For Oil Longs
That brings us to what’s the best option for oil bulls at present: U.S. crude draws.
In the face of continuously depressing global forecasts, the weekly EIA numbers have been a ray of hope for those long on crude as the gains that came on the back of strong drawdowns helped the market offset some of the worst bearish impact of global data.
U.S. oil consumption typically slackens with the post-summer decline in driving, and it remains to be seen whether WTI – which is up about 26% on the year – and Brent – which shows a 19% rise year-to-date – will continue gaining in the autumn and winter months.
But to reiterate, the EIA may likely remain the savior of the oil market and OPEC – not geopolitics.