“The geopolitical risk environment is dangerously close to the levels we haven’t seen since the early stages of Operation Iraqi Freedom” in 2003, warned Robbie Fraser, a senior commodity analyst at Schneider Electric.
Middle East tension has supported prices. On May 14, Yemen’s Houthi rebels, who are fighting the Saudis, claimed responsibility for armed-drone attacks that halted pumping at a key Saudi oil pipeline. A day earlier, Saudi Arabia said that a weekend sabotage attack had damaged two of its oil tankers off the eastern coast of the United Arab Emirates, near the Strait of Hormuz, a major choke point for nautical traffic.
The purpose of the attacks appears to be “to illustrate that it is not just the Strait of Hormuz that is under threat,” said James Williams, energy economist at WTRG Economics. “Both the pipeline and the U.A.E. province on the Gulf of Oman are facilities that allow crude to bypass the Strait of Hormuz.”
Iran threatened to disrupt the flow of oil through the strait, following the U.S. decision to fully implement sanctions against Tehran. This month, Washington sent bombers to the region, in response to what President Donald Trump described as an increased threat. Rising tensions with Iran also have prompted the U.S. to order all nonessential diplomatic staffer members to leave Iraq.
“Ultimately, we’re talking about a 1.2 [million barrel a day] drop in remaining Iranian oil exports, compared to last month,” said Fraser. “Add to that the exponentially higher risk of disrupting all the oil trade through the Hormuz Strait, and it’s difficult to underestimate the level of upside risk this market is confronting.” U.S. sanctions on Venezuela and unrest in Libya, both formerly major petroleum exporters, have also hurt global supplies.
Still, it’s important to realize that “saber-rattling…is hardly new,” Fraser observed. “The cost of escalating [the situation] too far is high, and that reality has kept tensions from fully boiling over between Saudi [Arabia] and Iran for years.”
Against that backdrop, U.S. and global benchmark oil futures have been trading more than 30% above year-earlier levels. On Thursday, West Texas Intermediate settled at $62.87 a barrel, while Brent crude finished at $72.62.
However, there has been some price weakness recently, as the U.S.-China trade war has raised concerns about a potential drop in energy demand.
‘With the current situation with Iran and the China-U.S. trade issues, the only thing we can forecast with certainty is volatility for oil prices.’ James Williams, WTRG Economics
WTRG’s Williams says the dispute “will definitely impact China more than the U.S. It also has the greatest impact on [the Organization of the Petroleum Exporting Countries], as China imports over two-thirds of its oil.”
The U.S. raised tariffs on $200 billion worth of annual Chinese imports to 25% from 10% on May 10, and Beijing officials announced retaliatory tariffs against $60 billion in U.S. exports to China, starting on June 1. The real risk, adds Fraser, is that the trade spat will trigger a global recession.
OPEC and its allies are scheduled to meet in late June, and a key topic will be whether to extend their production-cut agreement. Says Williams: “With the current situation with Iran and the China-U.S. trade issues, the only thing we can forecast with certainty is volatility for oil prices.”
The United States Oil Fund LP (USO) was trading at $13.07 per share on Friday afternoon, down $0.07 (-0.53%). Year-to-date, USO has gained 8.83%, versus a 8.11% rise in the benchmark S&P 500 index during the same period.
USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 110 ETFs in the Commodity ETFs category.
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