Last week, oil prices experienced the sharpest drop this year as concerns over a global economic slowdown caused by the China-US trade spat once again permeated the markets.
The sudden fall came in a weekend in which the prices were following a steady upward trend toward $74 per barrel on escalating tensions between Iran and the US and its allies in the region.
High oil prices are not in line with the policies of the Trump administration so maintaining a balance between the oil prices driving factors and the deterrent ones, has been for long, a great headache for the white house and China has played the major weighting role which has come to rescue Trump whenever his decisions push the prices in the white house’s opposite direction.
Considering the great worries that is spreading across the markets all around the world, it seems wise to ask, is the trade war really as concerning as it sounds? Or maybe Trump’s sudden outrageous clashes with China is all part of a conspiracy plan to keep the oil prices in a safe zone?
Trump and driving factors
Since the beginning of 2019, several factors have been constantly pointed out as big influencers in the oil market, among which the trade war between US and China, the tensions in the Middle East, OPEC+ deal, supply disruptions in OPEC and non-OPEC nations like Libya, shale oil productions and most importantly the US President Tramp’s constant interferes with the market, can be mentioned.
Some of the above mentioned factors have been supporters of the oil prices and some are pushing them down. The tensions in the Middle East, supply disruptions and OPEC+ production cut deal are three main drivers of the oil prices while the trade war and rising shale production are two major heavy weighs which are keeping the prices down.
One of the major policies that the Trump administration has been following, is to keep the oil prices down and that is in significant contrast with some other major policies of the white house. Washington has been constantly pushing to impose more and more pressure on Iran and Venezuela using oil as the main leverage.
In late April, Trump administration announced that Washington is going to sharply accelerate its efforts to drive Iran’s oil exports to zero, ending sanctions waivers that were previously granted to some of the Islamic Republic’s biggest customers.
Following this announcement, rumor had it that Iran is threatening to close the Strait of Hormuz and some Iranian officials actually hinted on the issue. In reaction to the news, the US deployed a carrier strike group and bombers to the region over “indications and warnings” from Iran.
The escalating tensions between the two sides still continues and is a major driver of the increase in oil prices.
On the other hand, defying Trump’s will for leaving the cuts deal, Saudi Arabia has been constantly stating that it will be committed to a balanced and sustainable oil market.
Saudi Arabia and some major non-OPEC producers like Russia have been following a supply cuts plan which is also complied by other members of the Organization of the Petroleum Exporting Countries (OPEC). The plan is aimed at reducing global oversupply.
Deterring factors
Contrasting OPEC+ efforts US shale production has been reported to be rising significantly in the past few years so that just recently the US was crowned to be the world’s top oil producer. The over follow of US oil into the market has been for long one of the major factors that contributed to the oversupply in the market and consequently lowered the oil prices.
Last week, the American Petroleum Institute (API) announced that the US crude stockpiles increased by 2.4 million barrels, to 480.2 million barrels.
However, the US shale production on its own cannot equate the upward pressure which is imposed upon the prices by the Middle East tensions and sanctions on Venezuela.
So facing the powerful factors which are driving the prices up, Trump is, once again, left with no choice but to go for its only weapon at hand, pushing for an escalation of the trade row with the Chinese.
Many believe that considering Trump’s disruptive nature, the US-China trade spat is developing into a more complex strategic dispute between the world’s two largest economies, however I believe the current situation is all temporary and as soon as Trump reaches its goals in the Middle East, the dispute with China will also be relieved significantly.
It is obvious that the concurrent happening of two opposite scenarios which are greatly influential in the oil market cannot be a coincident. And the US president’s on and off outbreaks with China is just a way of making sure to have a “safety valve” in case of overpressure in the market.
By: Ebrahim Fallahi
MNA/TT