In 2019, crude demonstrated a somewhat remarkable propensity to ignore geopolitical tensions.
If “ignore” is too strong, then suffice to say prices didn’t react as violently as one might expect over the summer, when a series of escalations in the Strait of Hormuz (including the downing of a US drone and multiple instances of outright piracy by the IRGC) culminated in Donald Trump calling off airstrikes on targets inside Iran quite literally at the last minute.
Of course, crude did explode nearly 20% higher out of the gate on September 16 after attacks on Abqaiq and Khurais crippled 50% of Saudi production capacity, but even that historic event was quickly faded as Aramco worked to restore output and the Trump administration appeared to indicate the US wouldn’t strike Iran in retaliation.
Part of the subdued reaction over the summer was likely attributable to lingering questions about demand destruction tied to the trade war and the deleterious effect of Sino-US economic tensions on the global economy. Last month, OPEC agreed to deepen production cuts in an effort to keep prices supported.
Now, the market faces what is perhaps an even more consequential event in the assassination of Qassem Soleimani. The general’s demise has plunged the region into chaos and many expect Iran to target Saudi Arabia again as part of what will likely be a hodgepodge of retaliatory strikes against US interests in the Mideast.
Brent moved above $70 on Monday following a weekend of aggressive rhetoric out of both Tehran and Washington.
Trump on Sunday evening threatened to impose sanctions on Iraq – OPEC’s second-largest producer – in the event the country disinvites US troops, in keeping with a resolution passed by the country’s parliament. Trump also indicated he has no qualms with making good on his threat to destroy cultural sites and religious shrines inside Iran (he hasn’t explicitly mentioned Shia holy sites, but he has repeatedly used the adjective “cultural” when describing what the US might bomb).
Iran, meanwhile, indicated they are no longer bound by any of the stipulations of the nuclear accord.
One of Iran’s “options” is to close the Strait of Hormuz, although doing that would likely instigate an old school naval battle which the IRGC would have no hope of winning.
Still, such an eventuality would almost surely drive prices sharply higher in the interim, and it’s worth reiterating that Iraq is essentially a client state of Iran. Irrespective of the historical precedent for OPEC not allowing geopolitical tensions to completely dictate the cartel’s decision calculus, the killing of Soleimani could mean “the game has changed” (to quote Mark Esper).
“A lasting conflict would have wide-ranging implications through broad economic and financial shock that significantly worsen operating and financing conditions”, Moody’s said Monday, adding that “a protracted conflict would potentially have global repercussions, in particular through its effect on oil prices”.
And yet, some say barring an extreme escalation, oil’s upside may be limited in 2020 by last year’s blockbuster gains, which totaled 34% on WTI and 23% on Brent.
It’s worth noting that although the ebb and flow of the trade war effectively served to mute Mideast tensions’ capacity to bring about a sustained spike in crude during 2019, that doesn’t mean it wasn’t an eventful year. Indeed, 2019 saw WTI’s largest spike in a decade and biggest daily plunge in four years, with the former courtesy of the attacks on Aramco and the latter courtesy of Donald Trump’s decision to break the Osaka trade truce.
“The US-China trade war was in the driver’s seat [for oil] when we entered 2019 and remains there as we exit the year”, Vandana Hari, founder of industry consultant Vanda Insights, told Bloomberg on December 30, as demonstrators affiliated with Soleimani’s militias stormed the US embassy in Baghdad.
Oh, what a difference a week makes.