The oil shipping business just got more dangerous this week as geopolitics continues to dominate the headlines. Who’s holding what ships to account is getting more complicated and the market is nervous as to how will it all be resolved. In Friday trading, Brent crude was priced around US$63 with WTI close to US$56 a barrel.
The US President, Donald Trump said American forces shot down an Iranian un-manned drone in the Strait of Hormuz on Thursday. Its reported that the drone came close to the US warship USS Boxer and forces retaliated with “defensive action.” President Trump has warned that the US reserves the right to defend its people and assets in the region and calls on other key players to do the same. All sides are watching tanker traffic with great scrutiny; the news agency of the Iranian Revolutionary Guard said its forces had captured a Panamanian flagged ship said to be smuggling Iranian oil. Earlier in the week, Iran claimed it came to the aid of a troubled ship, despite reports of a hostile engagement. An Iranian tanker is still impounded by British forces in waters near Gibraltar.
Iran reiterated that it is not interested in negotiating with the US over its nuclear ballistic missile programme until they get sanction relief from the US. Earlier this week, Secretary of State Mike Pompeo said he believed talks were progressing with the Iranians. Helima Croft, head of RBC Capital Markets talked to CNBC this week and said that this level of geopolitical uncertainty would have raised prices in the past. She warns that key western powers have their forces positioned in the Middle East, but that “the oil market is shrugging it off because we have not seen physical supply disrupted,” adding that it would be a different story if we saw a direct attack on either side. Helping to maintain the price is the fact that “the US supply story has really changed the picture for oil.”
The high inventories that worry OPEC and oil producers around the world don’t seem to be shifting as fast as the market might like. Crude oil stocks in the US fell less than expected last week, with only 1.4 million barrels off the market according to the American Petroleum Institute. Analysts had expected close to double that figure, leaving stocks now at 460 million barrels. Gasoline stocks were also down, but distillate inventories rose more than expected. There’s still more than a million American barrels off the market in the aftermath of last week’s hurricane in the southern states, but that’s slowly coming back onto the market.
Inventories are obviously not drawn upon in times of low demand. This is a real worry for the industry. Croft said that a slowdown in China is a real threat to oil demand as the country reported slower quarterly economic growth. The trade dispute with the US is yet to be resolved, but Chinese growth is down to 6.2 percent for the second quarter. Oil imports are down, but not significantly for now. The US President has been suggesting that China is willing to do a trade deal soon.
Both OPEC and the International Energy Agency are closely watching demand and have acknowledged that its growing at a slower pace than in other years and impacting the market. With expectations of slower growth around the world, the IEA says we might see oil prices staying at these levels or lower as demand is slowing and “prices are determined by the market.”