China/U.S. Tensions Cause More Crude Losses, But Kilduff Says Iran is a Bigger Threat to Prices

Still, both supply and demand appear to be well-balanced: File Image/PixaBay

It was back to unwarranted trading patterns on Thursday, with the prospect of slower crude demand if the U.S. and China can't reach a trade deal causing crude prices to fall, albeit modestly: West Texas Intermediate settled 42 cents lower at $61.70 per barrel (set for a third week of losses), while Brent rose 2 cents to $70.39 per barrel (in line for a  second consecutive weekly loss).

The bearish tendencies of jittery traders is unwarranted in the eyes of many experts because of a conspicuous absence of any indication that demand now and for the foreseeable future is anything but robust; and to take Thursday as a single example, it was learned that U.S. crude oil stocks fell by 4 million barrels in the week to May 3, according to the Energy Information Administration.

Moreover, the EIA said it expects global oil demand to rise by 1.4 million barrels per day (bpd) this year.

Even if negotiations between the U.S. and China fall apart and cause a further drag on economic growth in Asia, the Organization of Petroleum Exporting Countries (OPEC) and allies have been scrupulous in their cutback strategy - while at the same time ready and able to add millions of more barrels daily if a trade deal is reached, regional economies rebound, and demand grows further.

And if traders are intent on focusing on the potential negative outcomes of geopolitical tension, John Kilduff, founding partner at Again Capital, thinks they should focus on the escalating conflict between the U.S. and Iran, which he described on Thursday as being "just off the charts right now in terms of being red-hot."

Kilduff explained that the Islamic republic under the U.S. sanctions is "experiencing economic strangulation that would make any sort of normal country act out at some point - I think that's what's supporting this oil price; that's why it can't break down, because you are subject to coming in one morning with some kind of incident.

"I'm not saying a blockage of the Strait of Hormuz or something severe, but some kind of tit for tat that will spook this oil market to the upside in a big way."

Kilduff went on to observe that "If you've been watching [oil prices] closely, they seem to be hanging out right around the $62 level, which is sort of the upside barrier; so, to the extent we can put in more time above that level, you're really looking at, I think, an upside run more than anything else in the short term."

However, as with all matters in the loopy crude market, a greater perspective goes a long way in assuaging fears: although Kilduff sees trouble coming from Iran, it was also reported on Thursday that the country appeared to restart oil shipments to Syria (to the tune of 1 million barrels in the first week of May) according to companies that track maritime tankers, thus further proving its ability to lessen the effect of the sanctions.

Also, while U.S. crude prices are down more than 6 percent from their 2019 high, they are still up nearly 36 percent year to date.