Crude Posts Biggest Monthly Loss in 2 Years on Deflating Geopolitical Tensions, Increasing Output

by Ship & Bunker News Team
Tuesday July 31, 2018

Despite persistent worries that a crude market tightening is inevitable due mainly to the U.S. sanctions against Iran and economic woes in Venezuela, growing evidence that Saudi Arabia,  Russia, and other countries are more than able to compensate for losses finally had an appropriate effect on prices Tuesday, which pushed crude benchmarks to their largest monthly decline in 2 years.

West Texas Intermediate dropped $1.37 to $68.76 per barrel, while Brent declined 73 cents to $74.24 per barrel; this meant that for the month, WTI and Brent dropped 7.3 percent and 6.5 percent respectively, the worst monthly declines since July 2016.

A host of reasons were cited for the losses, ranging from a Reuters survey released Monday showing that the Organization of the Petroleum Exporting Countries (OPEC) increased production in July by 70,000 barrels per day (bpd) to a high of 32.64 million bpd, to Russia declaring last week that its output will hit a 30-year high of 11.02 million bpd this year.

Also said to have inspired the selloff was U.S. president Donald Trump stating he is willing to meet with Iranian leaders to work out a new nuclear deal that better favours American interests; "I think we went from getting ready to price in a total loss of Iranian exports to maybe, just maybe, we wont lose any exports, depending on whether or not the Iranians take Donald Trump up on his offer," said Phil Flynn, senior market analyst at Price Futures Group Inc.

Yet another concern for a tightening market that is resolving far sooner than expected is Saudi Arabia's suspension of oil shipments through the Bab al-Mandeb Strait in the Red Sea: Yemen's Houthi group said it was ready to unilaterally halt attacks in the region to support peace efforts.

If that's not enough, one of the biggest concerns in analytical circles - the growing trade war between the U.S. and China - may be diffused in short order due to reports that both countries may soon restart negotiations, which as any student of hawkish politics can attest is usually the fundamental and expected objective of such skirmishes. 

Of course, from Iran's perspective, the world is headed towards disaster, and that country's OPEC governor,  Hossein Kazempour Ardebili, cited as proof OPEC's July output, which he dismissed as modest.

He told Reuters, "It seems President Trump has been taken hostage by Saudi Arabia and a few producers when they claimed they can replace 2.5 million bpd of Iranian exports, encouraging him to take action against Iran; now they and Russia sell more oil and more expensively, not even from their incremental production but their stocks."

Predictably, Ardebili forecast that crude prices will rise unless the U.S. grants waivers to buyers of Iranian crude.

However, arguably more troubling than geopolitical tension and all the other factors that can influence crude pricing is the seeming complete inability of these factors to be assessed deeper than the fear-mongering level propagated by mainstream media - who prefer to lay the blame on Trump for his "unexpected comments" and hard line stance against Iran.

John Kilduff, founding partner at Again Capital, on Tuesday seemed to partly acknowledge traders' jittery tendencies by remarking, "Welcome to a headline-driven market: it's duck and cover and keep an eye on your Twitter feed."

Given this landscape, it's perhaps not surprising that Ed Hirs, an energy economist at the University of Houston, could assess world events, conjure a scenario whereby the Strait of Hormuz might be partially blocked in retaliation for the sanctions against the Islamic republic, and then be published declaring that oil price will soar above $200 per barrel as a result.