Oil Edges Up Once More Due to "Temporary" Circumstances

Longer term developments may see prices resume their downward trajectory. File Image / Pixabay

A temporary halt on shipments through the Red Sea's Bab al-Mandeb route caused crude prices to escalate on Thursday for a third straight day, albeit modestly, while what could be a longer term event - India buying Iranian oil that is fully ensured despite the threat of U.S. sanctions - may prompt the return of the downward trend crude was pursuing of late.

West Texas Intermediate settled up 31 cents at $69.61 per barrel, and Brent climbed 61 cents to $74.54 per barrel, on the strength of Saudi Arabia saying it was "temporarily halting" oil shipments through the Red Sea shipping lane (which accommodates about 4.8 million barrels per day) after an attack by Yemen's Iran-aligned Houthi movement.

However, the closure is shaping up to be non-eventful: any bottlenecks will presumably be alleviated by the Saudis using their Petroline, also known as the East-West Pipeline, which mainly transports crude from fields clustered in the east to Yanbu for export.

To what extent the closure will affect shipping costs is unclear: "The passage is not as crucial as the Strait of Hormuz... but restricted flows through it would have an impact not just for crude but also for products due to the longer voyage time," said Olivier Jakob, managing director at Petromatrix, in a note.

Longer-term developments that may affect crude prices include U.S. President Donald Trump agreeing to refrain from imposing car tariffs while the European Union and his country start talks on cutting other trade barriers.

John Kilduff, founding partner at Again Capital, noted, "Certainly it's positive for the economy and commodities; this sort of revives economic prospects that were dimmed from the trade wars that were started."

Another potentially long-term event is Iran offering to insure oil cargoes to India after some local insurers stopped providing the service because of the impending U.S. sanctions, according to sources.

They also claimed that Indian Oil Corp and state refiner Bharat Petroleum Corp have started lifting Iranian oil in National Iranian Tanker Company-owned vessels with the cargoes covered by Iranian insurance.

Another source said Tehran's Bimeh Iran is providing insurance for oil cargoes while NITC has its third party liability insurance and pollution cover from the International Group of P&I Club.

Even though crude has experienced a few days of gains that have somewhat mitigated the much desired (by countries such as the U.S. and emerging economies such as India) drop in prices of late, a growing number of experts are predicting further downward movement based on the contention that global producers have more than enough ability to counter shortfalls from Venezuela and other troubled nations.

This was the case made earlier in the week by Citigroup Inc., which stated that Brent will fall back into a band between $45 to $65 per barrel by the end of 2019.