Trump Triggers More Fears About Geopolitical Tension Causing Price Disruptions, but Market Still Seems More Vulnerable to Overproduction

RBC Capital Markets continues to warn about rising tensions in the Middle East, Africa, and Venezuela. File Image / Pixabay

Although anti-government protests in Iran caused crude to slump slightly in Tuesday, Helima Croft, global head of commodity strategy at RBC Capital Markets, is maintaining her position that geopolitical tension is the most likely mechanism that will trigger substantial gains in 2018.

She told CNBC, "If you want to say, 'How do we break out of this range?' it would be a geopolitical story."

Stability in Saudi Arabia, and tensions in Venezuela and parts of Africa have been cited as potential triggers for higher prices, but when pressed to cite the most likely trigger in 2018, Croft mused that "If he basically says 'I'm not going to waiver sanctions anymore,' those energy sanctions are going to come back."

She is referring to U.S. president Donald Trump threatening to tear up the Iran nuclear deal brokered by former president Barack Obama by restoring sanctions that were suspended in 2016; in October, Trump refused to certify the international accord, and critics fear he will continue to refuse suspending sanctions this month, which would cause the deal to collapse.

But as the violent outbreaks in Iran on Tuesday demonstrated, it is the degree of geopolitical tension that will cause prices to shift one way or another: Phil Flynn, senior market analyst at Price Futures Group Inc., said of oil settling close to a 30-month high despite the civil unrest, "The market wants to see if the tension actually leads to disruption."

Eugen Weinberg, head of commodities research at Commerzbank AG, noted how easily such turmoil could cause prices to jump either way: "I would not be surprised if any outcome of the current crisis would be ultimately negative for the oil price.

"Should the protests lead to regime change, it might attract massive new investments and result in higher output."

Indeed, higher output rather than geopolitical tension continues to be the most persuasive source of price disruptions for many, and U.S. shale is hardly the only worry in this regard: for example, Reuters observed that Russian oil production continued to grow in 2017 with average daily output at a 30-year high of 10.98 million barrels per day - even though the former Soviet Union has expressed commitment to following the Organization of the Petroleum Exporting Countries' output reduction extension.

Last month in her efforts to warn everyone about geopolitical risk, Croft said that although the risk could offset U.S. gains, she still suggested that the likely only victor in the oil industry for 2018 will be the Americans, and that production "is going to come back" in the New Year.