The state of uncertainty has returned to the oil markets in recent days due to a number of factors affecting prices. The recent reshuffling of political figures initiated by President Trump, the consequences of a potential break in the nuclear agreement with Iran and the related geopolitical tensions in the Middle East stimulated price increase. The probability of the beginning of trade wars between the US and China influences the prices as well. The matter is, oil prices fell every time the trade war escalated, as the US trades less oil to the world’s largest oil consumer. The successful production of American oil shale also affects the resources cost formation.
The start of the auto traffic summer season leads to an increase of gasoline consumption, and stimulates oil refineries to consume more raw materials to meet demand. The general dynamics of the population’s life will help provide some potential for rising oil prices.
Soon, the Donald Trump’s administration will have to decide on the Iranian deal known as the Joint Comprehensive Plan of Action (JCPOA). In March, the President dismissed national security adviser Herbert McMaster.He was replaced by former US ambassador to the United Nations John Bolton who had repeatedly spoken out for the use of military force against Iran. Perhaps, this fact signals the administration can take the more militant stance towards this state. According to experts’ forecasts on May 12, 2018, the US can abolish the JCPOA agreement. The Bolton’s appointment caused an increase in oil price. News about the break of the contract, most likely, will lead to a new round of volatility. It is too early to say whether this geopolitical event will become a factor of long-term influence on the oil cost, or it will turn out to be a short-term driving emotional force.
The June meeting of OPEC members will bring many reasons for unrest. Perhaps, the markets should prepare for the rally. However, if the meeting is held without surprises and none of the participating countries wishes to leave the organization, there is a possibility of a price reduction.
The significant factor of influence on oil pricing is the possibility of trade wars between the US and China economies. The more stringent policy of the Trump’s administration can enter a period of disagreement with US foreign policy issues. The President proposed to raise duties on steel and aluminum (by 25% and 10%, respectively) and expects to impose an additional $60 billion of extra tariffs in other areas.
China quickly reacted to the first sanctions and announced they will mirror Trump’s actions. The next decision of the US president was to give another tariff plan for Chinese products of about 100 billion US dollars.
And although these trade wars look artificial, they can have serious consequences. Each new trade aggravation always ends with a drop in demand and a decline in the oil price. At the same time, events in the Middle East have the opposite effect and can push prices up.
Also, the extraction of shale oil in the United States is constantly increasing. Production volumes act on a decline, reaching 10.5 million barrels per day. According to the International Energy Agency (IEA), the crude oil enterprises production next year will grow to 11.44 million barrels per day.
At the 16th International Energy Forum, the EIA head Fatih Birol, spoke about the readiness of one more wave of shale raw materials to enter the markets. It also forecasts growth in production outside the US – on offshore in Brazil and in parts of Africa. The recent rise in oil prices has led to an increase in shale production and this alignment of forces can cause the oil markets to enter a closed loop.
American shale companies have learnt the lesson after the oil prices fall and this is the good news. They sufficiently hedged production and, finally, acquired investment attractiveness.
The above factors of influence on pricing can be conditionally divided into several types: temporary (geopolitical), uncertain (OPEC) and relatively constant (increase in the oil shale production). Experts should focus on monitoring each of these forces in order to better understand how different solutions drive the market.