Soaring U.S./Iran Tensions No Match for Crude Oversupply Worries as Prices Plummet Again

Thursday July 18, 2019

Crude prices on Thursday continued their downward trajectory in reaction to the expectation that stockpiles will soon swell as producers in the Gulf of Mexico resume output in the wake of Hurricane Barry.

However, late breaking news that a U.S. warship has shot down an Iran drone in the Strait of Hormuz, thus escalating tensions even further between the two countries, could prove to be a boost for Friday's trading session.

But even the Iranian situation is no guarantee of price support: crude rose earlier in Thursday's session after the Islamic republic said it had seized a foreign tanker, but prices retreated when it was learned that the vessel had only a small cargo and was detained for fuel smuggling.

Instead, normally good news (at least, for U.S. interests) on Thursday that Royal Dutch Shell, a top Gulf producer, had resumed about 80 percent of its average daily production in the region resulted in renewed fears of an oil glut.

West Texas Intermediate fell $1.48 - or 2.6 percent - to settle at $55.30 per barrel (the benchmark dropped 1.5 percent in the previous session, and 3 percent on Tuesday); Brent fell $1.94, or more than 3 percent, at $61.72 per barrel (the commodity fell 1 percent on Wednesday and 3 percent on Tuesday).

Giovanni Staunovo, analyst at UBS, noted that although "The oil price reaction on Thursday shows once again that the conflict in the Middle East is far from solved and tensions could flare up at any time," he added that "As oil keeps flowing, prices are likely to rise only temporarily."

Indeed, Helima Croft, global head of commodity strategy for RBC Capital Markets, pointed out that despite spiking tensions in the Middle East, oil prices have shed 13 percent since May 1 and nearly 8 percent in the last week.

She theorized that "this standoff over Iran is going to continue over the summer"; she also noted that "the problem for the Iranians is all these one-off attacks on tankers are not moving the needle on oil prices."

Croft went on to observe that "Geopolitics has been this pillar supporting oil prices, but that really seems to be the main pillar right now, and so there's all these other big concerns about demand and economic malaise out there."

She concluded, "I think it's going to be this struggle over the next couple weeks between the demand story and the geopolitical story, and we're just going to have to see how both stories unfold."