The future can only bring results on how tariff deals will affect global trade but with Vietnam being added to trade deals secured before the deadline next week, a fresh bout of risk-on pervades markets and prices react accordingly. President Trump’s tax and spending bill has also proved inspirational to investors who choose to pick out the savings from tax and civil payouts rather than the new accrued debt and put bourses into all-time high territory. Oil prices yesterday had little reason not to adhere to the wider mood but were spurred on by micro influences of their own. Notwithstanding a crumbling US Dollar bought about by the spending bill and Trump’s incessant undermining of the Federal Reserve, geopolitical news and nature decided to lend a helping hand. In Iran, President Masoud Pezeshkian put signature to a law suspending cooperation with the International Atomic Energy Agency (IAEA). This is held as bullish on two counts, it brings a notion of the US and Israel once again attacking Iran’s nuclear capabilities and the other is that a ‘snap-back’ mechanism exists in the 2015 nuclear deal that non-compliance by Iran with the IAEA would mean a reinstatement of all UN sanctions, which will once again target Iranian oil exports. The scorching weather in North America has seen wildfires again breakout in Alberta, Canada. The fire is close to the 250kbpd Firebag facility and not so very far from the massive production area centred at Fort McMurray. Rain is reported in the coming days, but if it fails to quench the blaze any production halt will bring stress to a market that is still in search of heavier crude grades that balance out the proliferation of lighter crudes and their blending for refinery purposes, and the shortfalls seen in Distillate production which added pep to the rally.

Quieter news will bring further drift

This week has seen the much listened to opinions of grand banks such as Morgan Stanley pitching a case for $60 crude again. It must be said that such a prediction will see little argument from these quarters at present, even with the present rally, although we doubt there is reason enough to change our minds on $55/barrel being the bottom. While Americans wind down into Independence Day celebrations, it gives a goodly opportunity to ponder on the next moves for crude oil prices. 

Risk remains predominantly to the upside and will probably be powered by events in and around the Middle East. We live in a cynical world, but even our market’s almost nonchalant subsequent reaction to airstrikes involving possible nuclear weapons is one for the annals of ephemera. Our fraternity has fast learned that conflicts rarely do long-term damage to oil infrastructure, and even the setting ablaze of Kuwaiti oil fields by the retreating forces of Saddam Hussein during Gulf War I left only a small scar on the world’s oil flow. It really cannot be argued against that a current, archaically termed, ‘gentlemen’s agreement’ exists where oil production should not be targeted. Given such thoughts, the idea of the Strait of Hormuz ever being blocked is an anathema to the theory that oil must flow no matter what. Indeed, the damage to the global economy in any, unlikely as it may seem, elongated closure of the waterway is inestimable. A crude value of say $120/barrel will wreak havoc not only in inflationary terms, but in how central banks are striving to bring down interest rates in a world possessing delinquent manufacturing, industry and overall growth. Yet there resides risk premium, rightly so when confronted with new US reports. Tehran has often voted and threatened on closing the strait but never delivered. However, according to Reuters, quoting a US intelligence source, just after Israel started its air campaign last month, the Iranian military loaded mines on vessels which were to be deployed into the shipping bottleneck, adding more spice to Iran’s decision to no longer cooperate with the IAEA.

There are other underlying influences that may be called upon by those of a bullish persuasion. The current strength and lack of stock in Distillate, a yet-to-arrive Gasoline season and reports of limited availability of medium Crudes for refiners to get the best from processing, fly as decent wingmen to bullish arguments, but they do not have the ability to rally Crude prices by tens of dollars. That is the remit of geopolitical flare-ups and the more they quieten, the more price drift will be witnessed. Countering the medium-grade issues for Crude is the arrival of more OPEC+ oil. With the impending decision by the cartel and friends to bring back another 411kbpd of cuts in August, matching those of May, June and July, any crude supply issues are likely to find quickening solutions. Indeed, circling back to Morgan’s $60/barrel shout for Crude is its prediction that non-OPEC supply will see 1mbpd growth over the 2025-26 period. Shout all it might that OPEC’s returning of barrels is somehow a lesson for cheaters such as Kazakhstan, faced with such non-DUC supply growth the cartel must elbow its way back into market share, the real reason for abandoning cuts.

Macro-economics are hardly bringing streets paved with gold for oil demand. The abject manufacturing PMIs this week saw not one of the largest economies in Europe above expansion of a 50.0 reading. The US ISM PMI was 49.0 and with China, Japan, South Korea only just limping across the expansive metric, industrials hold no hope for oil demand. Collaboration was found in most PMI reports blaming tariffs, or a least the fear of them, as important contributory factors of manufacturing malaise. Stock markets seem to love any knocking off the country list by the US as it finds trade deals, but the clock is ticking as the July 9th deadline approaches. Whether or not the US President plays ‘chicken’ with the deadline is never good for corporate forward planning and by default investment and growth. As much as stock market investors believe a roundhouse 10% tariff is acceptable when going about global business, oily brothers and sisters can only see hinderance to underlying use. Vernacular from Gasoline pump watchers have that prices go up like a rocket and come down like a feather. This is true for the Crude market at present with the ‘rocket’ being the Middle East and the ‘feather’ being macro-economics and increased supply. Without further metaphorical or literal rockets, and or weather events, this market is likely to feather its way lower towards $60/barrel in thinning interest.

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