By Barani Krishnan
Investing.com - It has taken nearly three years but geopolitics is back like never before in oil as a Saudi-Iran face-off raises the specter of a new Gulf war that’s front-loading crude prices. There’s just one problem for oil bulls though: The U.S.-China trade war is blowing out at the same time, and the fallout to the global economy from that could offset much of the positive impact brought on by the geopolitical risk to crude that’s spiking in the Middle East.
The trade war is also sending gold in all directions as investors try to decide whether the yellow metal or the U.S. dollar is a more worthy hedge
As OPEC holds a preliminary meeting today ahead of its June 25 decision on production cuts, sparks will likely fly between Riyadh and Tehran as they sit across each other as partners of the cartel despite their epic enmity. The Saudis accuse Iran of masterminding this week's sabotage of the kingdom's oil industry after Houthi rebels, known for their support of Tehran, claimed responsibility for drone attacks on two Saudi oil pumping stations. Earlier in the week, both the UAE and Saudi Arabia reported that their oil tankers in the Gulf were hit by projectiles, implying that the Iranians had a hand in that too. The Islamic Republic, on the other hand, has yet to forgive the two for their support of the Trump administration in the U.S. sanctions on Iranian oil.
What happens in today’s OPEC meeting is for another day’s telling, but, for now, back to what happened in the week that was in oil.
Energy Review
Crude futures rowed back much of the week’s early gains after China’s state-run media expressed impatience over the trade negotiations, after Huawei and other Chinese companies were shown the door from the U.S. market.
Brent futures, the U.K.-traded global benchmark for oil, closed at $72.21 per barrel, finishing Friday’s trade down 41 cents, or 0.6%. West Texas Intermediate futures, the benchmark for U.S. crude, settled at $62.76, down 11 cents, or 0.2%, on the day.
It had been an extraordinary week in oil, with Brent earlier soaring to a one-month high of $73.36 and WTI hitting a two-week peak of $63.64, on fear that a new war might break out in the Persian Gulf after Saudi Arabia accused Iran of sabotaging the kingdom's oil infrastructure.
Iran, officially barred from selling its crude under U.S. sanctions, had previously warned other oil exporters of "consequences" for supporting the action by President Donald Trump. But it denies charges of trying to sabotage Saudi oil facilities through its Houthi rebel allies, who have claimed responsibility for at least two drone attacks on Saudi oil pumping stations.
In spite of Friday's retreat, Brent still ended the week up 2.2%, while WTI gained 1.8%.
Oil turned direction after Taoran Notes, a pro-government WeChat blog run by the state-owned Economic Daily, said it was "meaningless" for Chinese officials to meet with their American counterparts when Washington wasn't showing any sincerity for the welfare of Chinese commerce in striking a trade deal.
The comments, coming just a day after the White House excluded Huawei and other Chinese companies from the U.S. market, mark a turn in rhetoric for China, which had previously been patient and hopeful on a deal being reached.
Anxiety that there could be all-out break in war in the Gulf was also dialed back by media reports quoted senior Trump administration officials as saying the president actually had no wish to push the U.S. into a war with the Islamic Republic.
"I am not a believer in the 'Middle East Tension' story as I have been numbed in my years on this, and the addition of Trump into the picture only makes it seem worse," said Olivier Jakob at PetroMatrix, an oil consultancy in Zug, Switzerland.
"The chances of conflict to me are still very low, which tells me not to embrace this rally as it's too news-driven."
That has raised question on how courageous oil bears might be in trying to short the oil.
John Kilduff, partner at New York energy hedge fund Again Capital, said in a recent interview with Investing.com that those with the “right strategy and conviction will dig their heels in to go against the trend, as nothing is more thrilling to them than proving the market wrong.”
But he adds: “You got to remember then you’re practically standing in the path of a freight train. This isn’t for those with a weak gut or easily overwhelmed by the multiple fear elements used by the bulls now to whip up prices.”
And it’s not just geopolitics that’s working against the bears. The market structure of the current oil rally also has time-spreads in favor of the flat price. That’s causing some of the deepest backwardation in oil now, where contracts farther out trade at large discounts to those nearby, earning “easy” money for those who just roll out of front months that expire into new ones. This is what is giving legs to the oil rally.
Said Scott Shelton, energy futures broker with ICAP in Durham, N.C., himself an oil bear: “I think it’s safe to say that this is a ‘perfect storm’ of bullish physical information with a healthy amount of geopolitics risk out there.”
“For those looking for sellers, I think you have to look to the producers, which will only worsen the backwardation.”
Energy Calendar Ahead
Tuesday, May 21
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, May 22
The EIA weekly report on oil stockpiles.
Thursday, May 23
EIA weekly natural gas report
Friday, May 24
Baker Hughes weekly rig count.
Precious Metals Review
Bullion and futures of gold hit two-week lows on Friday, breaking decisively from the bullish $1,300 levels, as dollar bulls made more of the uncertainty in U.S.-China trade talks than gold bugs.
Spot gold, reflective of trades in bullion, last traded at $1,277.81 per ounce on Friday, down $8.85, or 0.7%, on the day.
Gold futures for June delivery, traded on the Comex division of the New York Mercantile Exchange, settled down $10.50, or 0.8%, at $1,275.70 per ounce.
Spot gold reached a one-month peak of $1,303.35 on Tuesday, after China countered higher U.S. tariffs on its goods by announcing duty hikes of its own on American merchandise. June gold soared to a one-month high $1,304.15 the same day.
Unlike many assets, gold is in an unique position over the U.S.-China trade war. A positive development on that means bullion could benefit from more jewelry and other bullion-related consumption in China, while a negative outcome could bolster gold's standing as a safe-haven hedge against further weakening in Chinese growth.
But in recent days, the dollar had caught up as a hedge too to the trade war angst.
The Dollar Index, which measures the greenback against a basket of six currencies, hit a two-week high of 97.84 on Friday.
Precious Metals Calendar Ahead
Monday, May 20
German PPI (April)
ECB's Praet Speaks
BoE’s Broadbent Speaks
FOMC Member Clarida Speaks
FOMC Member Williams Speaks
Market holiday – Canada
Tuesday, May 21
Fed Chair Powell Speaks
BoE Governor Carney Speaks
U.S. Existing Home Sales (April)
Eurozone Consumer Confidence (May)
FOMC Member Evans Speaks
FOMC Member Rosengren Speaks
Wednesday, May 22
U.K. CPI/PPI (April)
ECB's Praet Speaks
Canada Retail Sales (March)
FOMC Member Williams Speaks
FOMC Member Bostic Speaks
FOMC meeting Minutes
Thursday, May 23
German GDP (Q1)
French Flash Manufacturing/Services/ Composite PMI
German Flash Manufacturing/Services/ Composite PMI
Eurozone Flash Manufacturing/Services/ Composite PMI
German Ifo Business Climate Index (May)
ECB minutes
EU Parliamentary Elections
U.S. Initial Jobless Claims
U.S. New Home Sales (April)
U.S. Manufacturing/Services PMI (May)
FOMC Member Barkin Speaks
FOMC Member Bostic Speaks
FOMC Member Daly Speaks
FOMC Kaplan Speaks
Friday, May 24
U.K. Retail Sales (Apr)
ECB's Nowotny Speaks
U.S. Durable Goods Orders (April)
EU Parliamentary Elections