Oil prices to depend on Iran sanctions, demand

These days one cannot talk about global oil markets and fail to mention President Trump’s name. Definitely the most powerful person globally, Trump’s involvement in the Middle East geopolitics and the ongoing trade wars with China are directly or indirectly impacting global oil supply, demand and prices.

The other two global strongmen, Putin of Russia and Xi Jinping of China, are often forced to cautiously react to Trump’s unplanned and unpredictable moves, not wanting to be caught unprepared in global events unleashed by Trump. Similarly, the oil markets have to react and adjust to any Trump-driven impacts.

In respect of Middle East geopolitics and specifically oil, Iran is the principal victim of the ongoing US economic sanctions which target achieving zero oil exports from Iran. President Trump expects his allies, Saudi Arabia and UAE, and to a large extent Russia, to step up production to meet supply shortfalls from reduced Iranian exports. The USA is also stepping up exports of US produced oil, which for Trump is good business.

Russia is a seemingly impartial player in the Middle East, and appears diplomatically at ease with all the key geopolitical players — the USA, Iran, Saudi Arabia, Israel- and also China. Russia is one of the three top global oil producers, and is also an “adopted” member of the OPEC (Organisation of Petroleum Exporting Countries).

The US sanctions on Iran are largely seen as a “proxy” effort by Trump on behalf of Saudis and Israelis, both of whom are strong US allies with a shared interest in ensuring that Iran’s influence in the region and its nuclear capacity are significantly reduced. There is also the historic Sunni and Shiite regional rivalry between the Saudis and Iranians which motivates the Saudis to work with the US to diminish Iranian influence.

Trump’s embargo on Iranian oil exports is impacting China, a close ally of Iran and the largest importer of Iranian oil. Fear of Trump’s secondary sanctions on dollar banking systems has ensured that China, India, South Korea and Japan do not break the Iranian oil boycott.

For these countries, falling foul with Trump is not a wise economic option. Specifically, as long as the China-USA trade negotiations are not fully concluded, Xi-Jinping will definitely not want to open another battle front by bursting Iranian oil sanctions. The trade conflicts are bad enough.

In respect of the USA-China trade wars, any outcome that potentially reduces Chinese economic and industrial activity will correspondingly reduce oil demand in China and indirectly across the world. The oil price dip to about $70 last week was attributed to fears of an economic downturn from the trade wars.

Somehow, using the power of his “tweets” and occasional threats, Trump is trying to ensure that enough oil is produced by ally countries to keep prices at around $70 per barrel, which is thought to be Trump’s target safe price. As long as prices remain at this level, US consumers are shielded from high oil prices, while Trump achieves his goal of bringing the Iranians down on their knees.

On another far-off front, the ongoing Venezuelan oil sanctions by President Trump are further reducing global oil supplies as direct and secondary sanctions take full impact.

Yes, Trump is by default slowly assuming the role of de facto controller of global oil supply and prices, a role that has traditionally been played by OPEC, which has lately lost influence and unity after Iran (a key member) has become a victim of actions abetted by a number of its partner members.

Going forward, the two factors that will influence global prices is the supply balance (or imbalance) arising out the Iranian and Venezuelan exports boycotts as well as reduced demand from potential economic downturn arising from the US-China trade wars. What is not factored in as yet is any attempt by the US to militarily intervene in the enforcement of the sanctions in the waters of the Arabian/Persian Gulf.

Yes, Trump has his footprints in a number of global happenings, which are already impacting oil supply and prices.