Why oil is still undervalued

Oil prices fell during the past week, exacerbated by tension in the Middle East, but driven by fears of the fallout from the US-China trade war. In fact, crude is trapped between these two forces and will likely rebound in the near future depending on the factor that seems to exert more influence on the market.

Oil has been under increasing pressure in recent days, as the US government seems to be in danger of embarking on a new war in the Middle East. National Security Advisor John Bolton seems intent on trying to escalate the conflict with Iran – although tensions have escalated rapidly over the last two weeks, National Security Council officials Bolton "first ignored the need to develop de-escalation options". CNN reported, a clear sign of Bolton's intentions.

However, President Trump seems to be trying to curb even as he is largely in agreement with the "maximum pressure" campaign on Iran. He reportedly told the Pentagon that he did not want a war. After all, he campaigned to rid the United States of endless wars in the Middle East. Nevertheless, after pushing the United States to the brink of conflict, easing tensions may not be so simple, especially with Bolton and Secretary of State Mike Pompeo still in charge of the show.

Trump's decision to withdraw from the nuclear deal last year, followed by sanctions on Iran's oil, sanctions on Iran's exports of metals and, more recently, sending shipments of War in the Persian Gulf – all these measures are intended to increase the pressure and provoke Iran to react. The danger is that both sides calculate badly.

In fact, the Wall Street Journal reported on May 16: "The information gathered by the US government shows that Iranian leaders believe that the United States planned to attack them, which would encourage Tehran to prepare for a possible counterattack. hit". as evidence of imminent threat from Iran. In short, the Trump administration plays a dangerous game. Any mistake or misinterpreted maneuver could theoretically lead to the outbreak of war. Related: A value game too good to ignore

The good news is that Trump seems to want to defuse himself. Trump met with the Swiss President on Thursday, which many see as an attempt to revive negotiations with Iran. The Swiss have served as intermediaries between the two parties in the past. Trump also said on twitter May 15, "I'm sure Iran will want to talk soon."

In this alarming context, oil prices have escaped serious concerns about the global economy, with Brent falling to $ 72 a barrel last week. Still, the market "underestimates Iran's risks," according to Bank of America Merrill Lynch.

At the same time, the Brent futures curve shows a fairly strong regression, in which first month contracts are traded more expensive than longer futures contracts. This suggests that the market is tense, at least for now.

At the same time, the trade war between the United States and China poses huge risks to oil. In fact, demand was already slowing before the last tariff series. "[G]Global oil demand growth has slowed sharply in recent months, averaging 680 Mb / d in the last two quarters, compared to a trend growth of 1.46 million b / d over the last five years, "writes Bank of America Merrill Lynch to customers The weak manufacturing activity in the United States, China and Germany has resulted in low demand for distillates, the bank noted.

The trade war could make things worse. Tariffs have affected "parts of the global economy," said Bank of America, but the recent rise could begin to affect more and more consumers. Like bank notes, models based on the US Treasury yield curve suggest that there is a one in two chance of a US recession over the next 12 months, although there is disagreement about the importance of This measure. Related: No, the overabundance of oil has not disappeared

The risk of a decline in crude oil is magnified by the fact that speculators have purchased a considerable volume of oil positions, which could have an influence on short-term prices. "[T]There is a risk that a large part of the speculative community will nervously withdraw from its positions if the chances of a US recession increase again, "Bank of America warned.

The trajectory of crude oil prices depends largely on what will happen next in the trade war between the United States and China. "In our view, the global business cycle is at a turning point. Weak manufacturing could weigh on services if trade wars end up damaging consumer confidence. In the event of a global economic slowdown, Brent could drop to $ 50 a barrel, "Bank of America analysts wrote. "On the other hand, in a US-China scenario, business confidence could come back with vengeance, leading to a weakening of the US dollar and stronger global growth. If the cyclical recovery of global demand coincides with a burst of IMO2020, the price of Brent could reach $ 90 / bbl. "

In short, the oil market "undervalues ​​future extreme risks," said Bank of America.

Bob McNally, chairman of the Rapidan Energy Group, said more clearly in a statement to Axios. "The oil market has rarely seen so many risks in both directions. China, trade and macroeconomic weakness could bring down crude prices by at least $ 15 and heightening risks of geopolitical turmoil in the Middle East and Venezuela could propel them upward. 39, a similar amount, "he said.

By Nick Cunningham from Oilprice.com

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