Oil & Geopolitics: A Week of Apparent Consequence

For the past several weeks, increasingly bearish forecasts for demand, largely caused by signs of an escalating and prolonged U.S.-China trade war, and growing supply concerns caused by geopolitical events, have driven oil market sentiment in opposing directions. Last week’s commentary on the market’s reaction to both real and perceived threats from Iran to disrupt crude oil, petroleum products, and LNG shipments through the strategic Strait of Hormuz once again highlighted the obvious supply issues. Yet price movements were limited, with Brent trading at $66/barrel this morning even as more bullish cheerleaders advanced the possibility of a trade agreement breakthrough at the upcoming G20 meetings (cautionary note: naysayers expect the trade dispute to remain largely unresolved or perhaps worsen).
Looking at the calendar and the array of potentially consequential events scheduled to play out in the coming week, we thought it useful to highlight how we got here and where we may be headed.

U.S.-Iran Tensions Rise

  • Following the U.S. assertion that Iranian entities were responsible for the June 13 tanker attacks in the Gulf of Oman, Iran officially denied culpability, and the international community largely refused to take sides save for urging bilateral de-escalation of tensions.

  • Exactly one week later on June 20, Iranian surface to air missiles shot down an unmanned U.S. drone, claiming it had ventured into Iranian air space. The United States asserted the drone was over international waters. 

Tensions Settle but at an Escalated Level as Iran Pushes the Limits of an All but Defunct Nuclear Deal

  • While President Trump refrained from ordering a retaliatory attack on the Iranian missile sites, he did approve a cyberattack against Iranian installations and instituted additional sanctions on Iran even as he expressed a willingness to open negotiations. His restraint was offered in the context of appropriate and proportionate responses, yet days later he vowed obliteration if Iran attacked “anything American.”

  • In morning tweets, the president also questioned why the U.S. military should be defending open navigation of the Strait of Hormuz, while other nations (e.g. Japan, China, and South Korea) depend more on Middle East energy supplies. He dispatched Secretary of State Pompeo to meet with allies to discuss regional security and suggested that the United States should be compensated for its historical and ongoing military presence in the region.

  • Iran announced its intent to exceed its stockpile of low-enriched uranium above the 300 kilogram cap specified in the Iran nuclear deal, arguing paragraphs 26 and 36 of the agreement provided for such actions. Iran has outlined that the U.S. re-imposition of sanctions and the European Union’s failure to provide adequate relief constitute non-performance under the pact. The expectation is that the cap will be breached on or about June 27.  

OPEC Finally Finds a Date for Its Next Meeting

  • Having witnessed oil prices rise from previous five-month lows, the Organization of Petroleum Exporting Countries (OPEC) rescheduled its June 26 meeting to July 1 in hopes of getting a clearer picture of both supply and demand growth prospects for the second half of 2019. Outcomes from the G20 session as well as further developments in Iran are expected to have a material impact on oil prices going forward, although different and conflicting results could marginalize movements in either direction. 

  • For OPEC, expectations for an extension of the current freeze agreement remain a virtual lock, though individual members may seek to adjust their monthly targets to maximize the quality value of their oil. Russia in particular is viewed as benefitting from both Iranian and Venezuelan disruptions, while U.S. light oil sales to China are likely to be impacted by the state of trade relations. Deteriorating conditions in Libya may provide an opportunity for increased U.S. crude sales to Europe. And of course, price fluctuations are likely to impact overall non-OPEC growth as well as demand strength—forcing OPEC to adjust accordingly.   

On the Home Front Gasoline Prices Look Set to Rise

  • On the U.S. side, the Philadelphia refinery fire is expected to impact both gasoline prices as well as utilization rates for operating facilities. The American Petroleum Institute and the Energy Information Administration reported significant inventory draws in crude and products in the latest release of their weekly data. And hurricane season is now upon us, which has the potential to cause further disruptions. 

Art of the Deal Meets Art of the Trade War in Osaka

  • Sources confirmed that President Trump intends to meet with both Russian president Putin and Chinese president Xi at the upcoming G20 sessions (June 28-29) later this week with hopeful speculation that a major trade war might be averted. Shared responsibilities for ensuring safe passage through the Strait of Hormuz is also expected to be discussed including with European allies.

  • From a geopolitical and policy perspective, we would note that convergence of the G20 discussions alongside efforts to deescalate tensions with Iran pose an interesting and ironic dilemma for the Trump administration. For a president who eschews multilateral diplomacy in favor of bilateral discussions and agreements, Iran’s uranium enrichment gambit coupled with tensions surrounding oil and gas transit through the Strait of Hormuz offer the prospect of a multilateral effort that unites the United States, European Union, China, and Japan in a common purpose and mutually shared objective. At the same time, failure to resolve or temper outstanding disagreements with China over tariffs and trade could trigger a new phase of more aggressive competition and open an enhanced and opportunistic role for Russia as a counterweight on a range of issues.   

Bulls and Bears

  • The financial markets continue to be very sensitive to “headlines,” and there is no shortage of headlines in the world today. Speculative bets, which have been shorting the market for weeks, may now be poised to reposition should more bullish indicators arise out of the G20 or Iran—so things could change as we prepare for the 4th of July holiday. These headline risks manifest in price volatility, and as we have said before, price volatility appears to be the norm for the near future. 
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. Albert Helmig is a senior associate 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).
© 2019 by the Center for Strategic and International Studies. All rights reserved.
Frank A. Verrastro
Senior Adviser (Non-resident), Energy Security and Climate Change Program
Albert Helmig
Senior Associate (Non-resident), Energy Security and Climate Change Program

Andrew J. Stanley