Iran, China, OPEC, and Holiday Gas Prices
July 3, 2019Last week, we published a commentary anticipating some of the outcomes of the G20 meeting, important side discussions on energy security and the Strait of Hormuz, Iran’s expected breach of the nuclear deal’s uranium cap, U.S.-China trade talks, and the recently completed Organization of the Petroleum Exporting Countries (OPEC) meeting. With those sessions now behind us, we thought it useful to provide an update on the outcomes and reflect upon the implications and reactions in the energy market.
U.S.-Iran TensionsSince last week’s multinational efforts urging both sides to deescalate, no new incidents have occurred in the Strait of Hormuz (although a Houthi drone strike reportedly hit Saudi Arabia’s Abha airport yesterday). Not surprisingly, however, the Trump administration announced on Monday that the U.S. strategy of exerting “maximum pressure” on Iran will continue until the country alters course. And while multilateral talks have begun with regards to stepped up efforts of securing safe passage through the Strait of Hormuz, the cost, logistics, and implementation challenges of convoy escorts and over flight operations to protect energy flows in the Gulf remain formidable.
On the nuclear accord front, the international Atomic Energy Agency (IAEA) confirmed that Iran has exceeded its stockpile of low-enriched uranium above the 300kg cap specified in the Iran nuclear deal. Iran had previously announced that it expected to breech the limit in late June, hoping to use the provocation to reenlist the support of European signatories of the deal to provide sanctions relief. They continue to maintain that paragraphs 26 and 36 of the joint agreement provide for such actions since the U.S. imposition of sanctions and the EU’s failure to provide relief demonstrate non-performance under the pact.
U.S.-China TradeAs expected, presidents Trump and Xi did meet alongside the G20 and agreed to suspend further tariff escalation and resume negotiations in hopes of eventually reaching a trade agreement. The United States will now delay implementation of its planned 25 percent import tariffs for some $300 billion of Chinese products and China has agreed to buy additional U.S. agricultural goods in return. However, markets appear to view the exchange as more of a “truce” than a significant breakthrough. Despite Treasury Secretary Mnuchin’s claims that negotiations are proceeding smoothly, the United States has not revoked its June 1 tariffs, and China has yet to accede on any of the major points of contention.
The outcome was, however, far better than a more acrimonious ratcheting up of hostilities that would likely further imperil global economic growth, but the rally in financial markets may prove to be short lived.
OPEC DeliberationsOPEC concluded its 176th conference on Monday and the OPEC plus meeting yesterday. Both outcomes aligned with the reported agreement between Russian president Vladimir Putin and Saudi crown prince Mohammed bin Salman at last week’s G20 summit. As expected, the organization agreed to an extension of its current production curtailment for the remainder of this year and through the first quarter of 2020 with hopes of stabilizing the oil market by bringing inventories in line with new supply and demand realities. The extension into 2020 reflects ongoing concerns over the pace and size of non-OPEC supply growth, the prospects for demand and economic improvements, and seasonal issues related to refinery maintenance when crude oil demand falls.
Oil prices rallied briefly on Monday after news of both the U.S.-China trade and OPEC decisions, but the gains quickly evaporated as gloomy economic and demand data continues to offset the promise of the supply agreement. Brent prices receded back below $64/barrel yesterday evening after jumping above $66 last week with U.S. gasoline prices hovering around $2.80/gallon (down 13 cents from a year ago) as we enter the holiday weekend.
Reversion to the MeanWe concluded last week’s commentary with a forward-looking perspective on headlines, fundamentals, and speculative positioning in the oil market and thought it worth reiterating, as sameness seems to have a short shelf life these days. Volatile prices are the product of both fundamentals (e.g., supply, demand, and inventories) and headline risk. Speculative bets, which have been prevalent in the markets for weeks now, seemed poised to reposition—and could do so in a big way should underlying fundamentals shift. Third quarter demand appears set to outpace new supply additions, which indicates a draw on stocks. Refinery throughput increases should further support crude prices along with concerns over Libyan output and hurricanes forming in the Gulf of Mexico over the next few weeks.
Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C. Andrew Stanley is an associate fellow with the CSIS Energy and National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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