Downside Risk Remains In Oil Markets

Oil prices have spiked more than 13 percent in the past ten days, with WTI touching $75 at one point, the highest since the 2014 price crash. The factors that have contributed are quite vivid. Trump’s request that Saudi Arabia increases its production by 2 million bpd and the ensuing fear regarding the spare capacity. Some issues at Libyan ports added to market fear as well, with production continuing to fall. Canada also played a role with the Syncrude facility closingdown, taking down 250,000 bpd offline. Arguably the most influential factor is the increasingly hardline stance that the U.S. is taking in regard to Iranian oil exports. In this bullish environment, it is important to keep an eye on the downside risks to oil and not get carried away with investor sentiment.

With U.S. mid-term elections in November, Trump is set to face increasing pressure. The trade war is already hurting some farmers in the U.S. and the steel and aluminum tariffs are hurting industries of all sorts; from automobile to oil. Trump’s Tweets suggest that higher oil prices are a key concern for his administration. Gasoline prices have surged above $3 and with every increase the likelihood of Trump tapping into the Strategic Petroleum Reserves grows larger. This is one of the key factors that would add downward pressure to oil prices.

One key downside factor that analysts should be conscious of is the easing of sanctions on Iran. Iran sanctions were one of the major reasons for an oil price spike, and the hardline stance taken recently by the U.S. has just made it even more important. If Trump’s administration uses its “case-by-case” analysis of countries to ease the threat of Iran sanctions, then we will almost certainly see more downward pressure on oil prices…

 

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