Oil bulls should be worried about a trade war

"Markets are always forward-looking," says Tamar Essner, chief energy officer at Nasdaq IR Intelligence. "Iran's exports are already down about 35%, when we look at crude and condensate [a very light oil] together, since President Donald Trump announced the withdrawal of the United States from the Global Joint Action Plan in May. The agreement between Iran and six world powers and the European Union was aimed at ensuring that Tehran's nuclear program had a peaceful purpose, rather than producing nuclear weapons.

"The market was really surprised by the degree of application of the United States," says Essner. In the past, she added, Washington had "targeted export reductions" with sanctions, but the current administration has "focused its efforts on the elimination" of exports from Iran, the world's third largest producer of chemicals. Organization of Petroleum Exporting Countries.

Countries like South Korea have fully complied with the sanctions and "China has already shown signs of a reduction in its import level," says Essner, noting that Iran's accumulation of oil in offshore warehouses shows "l & # 39; Iran had more trouble finding buyers. US allies have until November 4 to end oil imports from this country.

Since Trump's announcement in early May until mid-September, the price of Brent, the global benchmark, has risen by about 7%. It stood at $ 79.40 a barrel on Wednesday, up about 18% since the beginning of the year.

"European companies will certainly respect these sanctions to avoid fines and confrontation with the United States," said Sebastian Leburn, Senior Portfolio Manager at Boston Private. "About one-third of Iran's oil is exported to Europe, and that's where the reduction will be the greatest." Iran's crude oil and condensate exports reached 1.92 million barrels per day in August, against 2.32 in July. Global Platts.

Saudi Arabia and Russia are trying to ensure market stability as a result of Iran's sanctions, but some doubt their ability to offset the loss of barrels of crude oil.

In June, OPEC and Allied producers said they would limit the production cuts implemented in January 2017. This could increase daily production by one million barrels to compensate for a possible shortage. supply in Iran and elsewhere. A committee composed of OPEC and non-OPEC producers had to discuss the best distribution of the increase in production at a meeting in Algiers on 23 September.

However, it is unlikely that Saudi Arabia or Russia can compensate for the loss of oil, says Campbell Faulkner, data analyst at EOXLive. "No country has the swing production that it did a few years ago."

It is more likely that US West Texas Intermediate crude oil prices will reach $ 100, which will encourage production from drilled but unfinished wells to increase, "with greater US export to reduce the market," says Faulkner. This "will not replace all of the losses, but along with the marginal increase in global production, it can absorb the market to prevent oil from reaching the $ 130 range.

Iran, however, is not the only factor that will help guide the direction of oil.

Sanctions are likely to remove one to two million barrels of oil a day from the market, which is obviously very price-friendly. But the other important factor is the trade war, which is potentially very bearish for crude, as it could dampen demand, says Essner. Trump has imposed even higher tariffs and plans on hundreds of billions of dollars worth of goods from China, the world's largest energy consumer.

According to Brian Youngberg, Senior Energy Analyst at Edward Jones, "The most important factor over the rest of the year is probably demand rather than supply, and the" real "threat to oil demand comes from" the economic slowdown most important emerging markets together, not just China.

Myra P. Saefong writes about commodities for MarketWatch.

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