U.S, China Tariff War - Not Iran Enriching Uranium - Sways Crude Trading

Tuesday May 21, 2019

Tuesday's crude trading demonstrated yet again that you can't keep analytical worries at bay for long: despite disturbing news that Iran is ramping up uranium production, crude prices dropped on the strength of the prolonged tariff fight between the U.S. and China.

The ongoing concern that the trade war will slow global economic growth and cause a decline in the demand for oil resulted in West Texas Intermediate settling 11 cents lower at $62.99 per barrel; however, Brent posted a modest gain of 6 cents to $72.03 per barrel.

Other factors swaying traders were U.S. president Donald Trump threatening Iran with "great force" if it attacked American interests in the Middle East; Iran declaring it would resist U.S. pressure; and the closure of a major pipeline in Nigeria plus supply disruptions from Russia due to contaminated oil - both of which contributed to the perception that the crude market is tightening.

All but overlooked by traders was news on Tuesday that Iranian production of low-enriched uranium has recently increased fourfold, which threatens to further erode the Iran nuclear deal and destabilize a region that provides much of the world's energy supply.

Helima Croft, global head of commodity strategy at RBC Capital Markets, said, "We are woefully under-appreciating the seriousness of this crisis."

She added, "The market just believes it's like a perpetual game of brinkmanship and we never hit the tripwire; the question is, can we keep playing chicken without having a head-on collision?"

Meanwhile, Michael Tran, strategist for RBC, told Bloomberg television that while there are no end of factors that could cause supply outages around the world, "the question is, when will the Saudis bring barrels back on?"

He pointed out that this is of paramount importance to consider because Saudi Arabia is currently producing 500,000 barrels per day (bpd) below what they agreed to within the context of the Organization of the Petroleum Exporting Countries (OPEC) cutbacks, and if markets continue to tighten, they can bring all this surplus back to the market and still stay within the cutback agreement.

Tran's observations suggest, along with a host of recent arguments, that concerns over market tightening - which has influenced crude trading for months now - may be unwarranted.