U.S./China Dispute Heralds Increased Geopolitical Risk for Crude in 2018

Everything from Venezuela's economy to an election in Libya bears according to one analyst. File Image / Pixabay

While the Organization of the Petroleum Exporting Countries (OPEC) captured the bulk of analytical attention in the latter months of 2017 for its extended production cuts, as the New Year approaches the attention is rapidly shifting to another issue that many think will play a significant role in oil's direction in 2018: geopolitical tensions.

Helima Croft, global head of commodity strategy for RBC Capital Markets, told CNBC that January could see the first occurrence of such tensions  because that's the month U.S. president Donald Trump will have to decide whether to extend the waivers for sanctions against Iran.

Croft went on to say that Venezuela and its worsening economy bears monitoring in 2018, as does Libya as it heads into elections next year: "All the geopolitical stories could give movement to prices going higher, even though the fundamentals imply a softer pricing in Q1.

"There are a whole bunch of stories percolating; it's just a matter of which one comes to the fore."

Croft's outlook gained credence this week when U.S. spy satellites discovered that China is transferring oil into North Korea, which prompted Trump to warn that the activity may jeopardize a peaceful resolution to the confrontation over Kim Jong Un's nuclear weapons and missile programs.

The brash billionaire called on China "to help us much more" and signaled he might otherwise take punitive trade actions: "If they don't help us with North Korea, then I do what I've always said I want to do."

China, in turn, said there had been no United Nations sanction-breaking oil sales by Chinese ships to North Korea, and Ren Guoqiang, spokesman for the Chinese Defence Ministry, insisted his country and its military have strictly enforced resolutions against North Korea:n"The situation you have mentioned absolutely does not exist."

Unfortunately, these claims may simply exacerbate rather than diffuse the situation, since the U.S. satellites have visual, recorded proof of Chinese ships selling to North Korean vessels not just once but about 30 times since October.

An unnamed source told The Telegraph, "We need to focus on the fact that the illicit trade started after a UN Security Council resolution in September drastically capped North Korea's imports of refined petroleum products."

It is not known if China still sells crude oil to Pyongyang as Beijing has not disclosed its crude export data for several years.

Earlier this week, some experts downplayed the notion of geopolitical risk being a major factor in crude prices in the New Year: LBBW for example preferred to focus on the outlook that oil demand will be high with solid economic growth worldwide, and supply being tight because of high OPEC commitment.