Oil's Geopolitical Risks to Outweigh Trade Concerns

Oil prices have been steadily pulling back from six-month highs as trade worries intensify, with the U.S. threat to raise tariffs against Chinese goods appearing likely to become reality tonight. Both sides have been hardening their stance, and if we see an all-out tariff war, oil could slide lower along with a global rout in equities and commodity currencies.

The trade spat is raising global growth concerns, which could put a dent in the demand side of the argument for higher oil prices. If talks do not completely fall apart, we could see oil markets quickly focus on the geopolitical risks from Iran, Russia, Venezuela and Libya.

Iran

The escalation in the rift between the U.S. and Iran is showing no signs of slowing down. The ending of U.S. sanction waivers at the beginning of the month is adding further pressure to an already weak Iranian economy. A year ago, President Trump decided to pull the U.S. from the landmark nuclear deal reached under President Obama. The U.S. wants a stronger Iranian commitment to reduce its nuclear ambitions, which Iran has no interest in doing.

Upside risks for oil prices could accelerate if we see Iran take action in trying to shut down the Strait of Hormuz, which is a key transit point for more than 20% of the global seaborne crude-oil trade.

Russia

Last month's contamination of Russian crude in the Druzhba pipeline system is still not fixed. Russian oil quality has improved, but European refiners are not satisfied yet. Over 92% of Russian Urals crude exported from the port of Ust-Luga remains on board ships. This disruption could be resolved by May 11, but oil markets will still feel the effects of the three-week disruption.

Venezuela

The Venezuelan situation is intensifying as the U.S.-backed Juan Guaido failed to oust President Maduro at the end of last month. The uprising is likely to continue, but the opposition appears far from securing the required military support. It seems that the situation will need to see protests intensify and Guaido win over more military backers before another attempt can be made. Venezuelan oil production is at high risk of falling some more in the coming months. 

Libya

Libya's civil war is likely to show no signs of slowing down as the Libyan National Army (LNA) could continue to press on overthrowing the UN-backed government. Libya's oil is likely to see further disruptions and could see a lack of investment that would be detrimental to future growth. Oil revenues are down sharply, and that is putting continued pressure on the government.

WTI

West Texas Intermediate (WTI) crude remains vulnerable to the outcome of U.S.-China trade war and a potentially accelerated velocity in rising U.S. production levels. This week's crude oil inventory release saw stockpiles fall by a near 4 million barrels, while analysts expected an increase of 1.2 million barrels. Oil rallied off the release, but the recent batch of releases has been mixed, with some weekly results posting some unexpected large supply increases.

Price action on the daily WTI oil chart shows key support tentatively forming from the 23.6% Fibonacci retracememt level and the 50- and 200-day simple moving averages. If we do not see consecutive daily closes below the $60.00 level, we could see oil continue to stabilize here. If bearish momentum prevails, key support will come around the $56.40 region.

Loonie

If we do see oil prices manage to rise higher, the Canadian dollar could provide a bigger rebound. The correlation between the loonie and oil prices has been broken since March and could mean that the Canadian dollar can play catch-up here. Historically, strong oil prices bode well for the Canadian economy since oil is one Canada's major exports.

The OANDA order book indicator showed just before the U.S. close that the percentage of open positions held by OANDA's clients was 63.7% short and 36.3% long, while 0.6% of pending sell orders are at the 1.3510 level.

The contents of this article are for general information purposes only and do not take into account a client's personal circumstances. It is not investment advice or an inducement to trade. Examples shown are for illustrative purposes only and may not reflect current prices. Clients are solely responsible for determining whether trading or a particular transaction is suitable for them and for seeking professional advice.