Oil Drops Again as Traders Shift from Worrying About China to a Breakthrough with Iran

Now the worry is that the Islamic republic could over saturate the market with crude: File Image/Pixabay

The upside of a potential breakthrough in relations between the U.S. and China proved to be no match for worries over a breakthrough in relations between the U.S. and Iran on Monday, with crude traders previously focused on the economic damage caused by trade war now fearing that any negotiations with Tehran could result in the Islamic republic flooding the market with too much oil.

The announcement by French president Emmanuel Macron that Iranian president Hassan Rouhani and U.S. president Donald Trump would meet in coming weeks to find a solution to a nuclear standoff caused Brent to drop 64 cents to $58.70 per barrel; West Texas Intermediate  settled 53 cents lower at $53.64 per barrel.

The U.S./China conflict that has cast a pall on trading for the bulk of the summer seemed to be on the brink of a breakthrough with the news on Monday that Chinese vice premier Liu He said his country was willing to resolve the dispute through "calm" negotiations and opposed any increase in trade tensions.

For his part, Trump said he believed China was sincere about wanting to reach a deal.

Analysts resisted fully buying into the reports: "We are maintaining a market view that includes continued high-pitched price volatility that will be driven largely by headlines related to U.S.-China trade talks or lack thereof," said Jim Ritterbusch, president of Ritterbusch and Associates.

As for the Iran issue, John Kilduff, founding partner at Again Capital, noted that "The prospect for talks between President Trump and President Rouhani is a tantalizing, bearish element for oil prices: any thawing in the U.S.- Iran relationship would naturally expect to involve easing of sanctions on Iran, resulting in increased oil sales.

"The market can barely handle current supply levels."

Meanwhile, Bloomberg took time to discuss the unpredictability of the crude market, arguing that "It's getting tougher to bet on oil in the age of Trump trade tweets and Chinese retaliation, with hedge funds getting it wrong for a seventh time in nine weeks."

By contrast, before the last week of June hedge funds got the direction of crude wrong just seven times in six months.