U.S./China Causes Crude Losses as Analyst Urges Traders to Focus Instead on Iran

Monday September 2, 2019

With China on Monday imposing its 5 percent levy on U.S. crude in retaliation for Washington imposing 15 percent tariffs on a variety of Chinese goods, it was perhaps inevitable that crude prices would drop - although the two countries resolving to meet for talks to end the trade war this month softened the blow.

Brent on Monday settled down 59 cents to $58.66 per barrel, and West Texas Intermediate was down 33 cents at $54.77 per barrel.

Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, remarked, "Even as President Trump has indicated that scheduled talks between the U.S. and China are still to proceed, the market is more and more resigned to a protracted standoff between the two countries and will be looking towards central bank easing to shore up risk appetite."

The relentless focus on the trade war has relegated to the sidelines other news of considerable interest to those who prefer analyzing fundamentals than worrying about geopolitics: consultancy FGE reported on Monday that Iran's product exports at 400,000-500,000 barrels per day (bpd) in August, exceeding the top end of crude export estimates by other analysts of some 400,000 bpd for July.

This means that the U.S. sanction have barely affected Iran's exports of oil products, primarily fuel oil used for power generation and shipping as well as liquefied petroleum gas (with China accounting for more than 95 percent of Iranian LPG exports in June); indeed, Bijan Zanganeh, oil minister for the Islamic republic, was quoted as saying on August 27 that "In exports of products we have no problem."

Samantha Hartke, head of natural gas liquids and LPG at Energy Aspects, said, "The irony is if not for the U.S.-China trade war, the U.S. would have greatly benefited from this uptick in Chinese demand as a means of mopping up its overabundance of LPG supplies, thanks to shale."

Also on Monday, Alexander Novak, energy minister for Russia, said his country aims to fully comply with the  oil output cut deal struck in September; he added that Russian oil production decreased by 143,000 bpd in August from October last year, the baseline for the deal developed by the Organization of the Petroleum Exporting Countries (OPEC).

Frustrated by crude traders' fixation with the U.S. and China, Helima Croft, global head of commodity research for RBC Capital Markets, told CNBC on Monday that Iran could obliterate the current bearish sentiment with its flaunting of the nuclear deal and hostilities in the Persian Gulf, and drive prices higher before year-end.

She said, "I think we're headed more toward escalation, [and] the thing to really watch is if you get a retaliatory cycle: if these Iranian backed groups start targeting, for example, U.S. servicemen In Iraq, and there are about 5,000 U.S. servicemen in Iraq, if anything happens to those servicemen that really is a catalyst for this conflict going kinetic."

She added that if a diplomatic breakthrough with Iran is reached, oil inventory would spike: "There are a lot of Iranian barrels that are sitting off this market right now, 2 million barrels; that will be a big story in terms of how this market shakes out for the rest of the year."