Crude Price Gains Viewed as Temporary Deviation, Not a Rebound

A trade deal with China must happen if oil is to recover, says Croft: File Image/Pixabay

With attention focused mainly on the U.S. stock market and crude fundamental ignored as usual, it was relatively unsurprising that a price in stocks due to reports that U.S. president Donald Trump may delay imposing tariffs on Mexico would cause a price increase in oil on Thursday - at one point exceeding 2 percent.

Brent  settled at $61.67 per barrel, gaining $1.04, while West Texas Intermediate  settled at $52.59 per barrel, up 91 cents; both benchmarks rallied more than 2 percent in post-settlement trade.

The irony of the stock and crude increases is that Trump's comments on Thursday weren't all that upbeat: while it was rumoured he may delay action against Mexico, he also said he would likely decide on more China tariffs at the end of June,  following his overnight threat to put tariffs on "at least" another $300 billion worth of Chinese goods.

As if to suggest Thursday's gains were a temporary reverse of a relentless downward trajectory, Andrew Lipow, president of Lipow Oil Associates, pointed out that "The ongoing friction between the U.S. and China, the U.S. and Mexico and the U.S. and others on the trade front is really having a negative impact on the sentiment for economic growth around the world, which would lead to a reduction in the rate of growth of oil demand."

Accordingly, Morgan Stanley lowered its forecast for growth in oil demand for 2019 from 1.2 million barrels per day (bpd) to 1 million bpd, and cut its Brent price forecast for the second half of 2019 to $65-$70 per barrel, from $75-$80.

However, the investment bank noted that "We now estimate 2019 to be a year in which supply and demand broadly balance."

Helima Croft, global head of commodity research for RBC Capital Markets, theorized that the current price doldrums may be reversed almost instantly "If we get some kind of signal coming out of the G20 that there is an off ramp on the trade war ,and if we start to get the inventory draws that we are expecting because of summer driving season; that is what potentially moves us higher, back into this sort of $60s for WTI."

Proving there is no limit to wild speculation when it comes to the crude market, Yahya Rahim Safavi, a top military aide to Iran's supreme leader Ayatollah Ali Khamenei, warned that with regards to the tensions brewing between the U.S. and the Islamic republic, "The first bullet fired in the Persian Gulf will push oil prices above $100.

"This would be unbearable to America, Europe, and the U.S. allies like Japan and South Korea."

Putting Iran into perspective was Stephen Brennock, oil analyst at PVM Oil Associates; he suggested that oil in the triple digits was "ambitious" and the oil market has "more or less shrugged off" the disappearance of a further 500,000 bpd of Iranian oil since Washington terminated its sanctions waivers in May.