Oil prices up on tanker attacks, but long-term trend looks down

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Even before this morning’s attacks on tankers near the Strait of Hormuz, the next few days were likely to be, as they say, an “interesting time” in the financial markets. For most of us, it means we probably should stand back. But people with more money and experience may think it is a good time to be involved.

Why? Because even with the morning’s sharp boost to prices as a result of the attacks, presumably by Iran, it looks as though the longer-term price of oil will be weak. For those of us whose principal perspective is how much it will cost to fill the tank of our car, that sounds like a good thing. But it isn’t necessarily.

The oil market is said to be concerned that the world economy is slowing. That means a drop in demand for oil, or at least a less-than-expected growth in demand. A factor pushing this perception is the deepening trade war between the U.S. and China. Both sides seem to be digging in and there is little sign of compromise.

As Bloomberg reported: “Bulls Beware: The 2020 Oil Market is Quickly Turning Ugly.” Until today’s attacks, the particular focus of people’s attention was the publication of the International Energy Agency forecast, due out Friday. The Paris-based IEA, of which the U.S. is a member along with much of the western industrialized world, crunches the numbers to opine on underlying trends.

The forecast will be better sourced than the conversation that any two market analysts may have had over a coffee or drink this week. But it still will be only a forecast. And it will carefully avoid making any predictions on actual prices.

One version of what the data analysis can produce came out earlier this week with the publication of BP Statistical Review of World Energy. We all knew that shale oil and shale gas were boosting U.S. production figures in 2018, but BP’s finding that “the United States recorded the largest-ever annual production increases by any country for both oil and natural gas, the vast majority of increases coming from onshore shale plays” is still astonishing.

Of greater concern, except perhaps for those who share President Trump’s views on global warming, was BP’s finding that global energy demand in 2018 grew by 2.9 percent and carbon emissions grew by 2 percent, faster than at any time since 2010-11.

As the oil major’s chief economist, Spencer Dale, noted: “There is a growing mismatch between societal demands for action on climate change and the actual pace of progress, with energy demand and carbon emissions growing at their fastest rate for years. The world is on an unsustainable path.”

Putting this information together, a simple conclusion is that we could be heading for a slowdown, negatively hitting the relative growth in prosperity that many of us have enjoyed in recent years. That means that the less fortunate will be impacted even more.

Where we eventually go will depend on that complicated mixture of markets and policies — not just in the U.S. but across the world. Coming later this month is a meeting of OPEC+, the grouping of the traditional oil exports and the “+” being Russia. Unless you think Vladimir Putin is a force for good in the world, that is not encouraging.

But there is overlap between our interests and Putin’s. He wants to sell oil for the best price he can get. If there is a global slowdown, Russia’s revenues will fall.

The good news is that geopolitical events had been having little apparent impact on oil prices, until today’s attacks. The crisis in the Persian Gulf, which led the U.S. to dispatch an aircraft carrier and extra B-52 bombers last month did not cause prices to spike. The collapse in oil production in Venezuela, once a major OPEC player, has been easily absorbed by the market. Bizarrely, oil production in Libya continues despite a vicious civil war being waged on the outskirts of the capital, Tripoli.

Yet this is not a time to be complacent. U.S. leadership in the world is more contested these days than it has been, especially with Iran tweaking American military prowess. In oil terms, allies such as Saudi Arabia may not be adhering to the adage “security in exchange for adequate oil supplies at reasonable prices” as they have done in the past. Indeed, it was reported this week that Saudi Crown Prince Mohammed bin Salman, aka  MbS, invited Putin to visit the kingdom in October.

As with most news, especially developments released on a Friday, concern about what the IEA will forecast could be misplaced or rapidly overtaken by unexpected events. But the oil price is important and, at the moment, interesting.

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.

Tags Energy Iran OPEC Price of oil tanker attacks Vladimir Putin
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