It is laughable when large cities of the world boast on having integrated transport systems as their citizens perspire to work in the gunnels of subway services, enjoy a train where the heads up display tells of one destination and the driver another, and roads are so narrowed for cyclists and buses that catching a taxi across a metropolis results in a dip into one’s savings. It leads to a sense of exasperation, of resigned acceptance and so it is now with markets experiencing a US Administration that one day boasts on bringing the world to heel in fair trade deals and the next trying to deprioritise them. The U.S. is “very close to some deals,” so said US Treasury Secretary Scott Bessent on Monday, while his leader yesterday upended Bessent’s pitch by saying the that the United States does not need to “sign deals”.

The US President’s grumpy revelation came during a meeting with new Canadian Prime Minister Mark Carney where nothing much was achieved. However, markets this morning, including oil, are cock-a-hoop that the US and China are to finally meet in Geneva this weekend and after a relief rally yesterday by oil from year-to-date lows, expectancy of ice-breaking talks takes up the baton of hope for the moment. Yet, caution should be applied. One of the picks from a spokesperson of the Chinese Commerce Ministry, as seen on Reuters, warned "There is an old Chinese saying: Listen to what is said, and watch what is done.” If markets have learned anything it is that words, particularly from the US are ephemeral, and sometimes have less than a 24-hour lifespan. Such changes of heart and fortune are taken up the EIA in its Short-Term Energy Outlook. Addressing how the market expects more available global supply, particularly from OPEC+, and the uncertainty caused by tariffs and their use as diplomatic negotiations can only lead to a sustained period of volatility. We heartily agree.

Lack of supply security limits price downside

The recent and, in our opinion, inevitable capitulation by OPEC+ to bow to market forces and the current churn of geopolitical climes, has brought about an expectation of lower prices for the oil suite. It is a captivating view and one that ordinarily would offer a straight line run where the monthly increase of OPEC oil production would inversely track diminishing values for oils, well, at least those of crudes. Bearing in mind the belligerence shown by Iraq and Kazakhstan to all overtures of reasonable restraint in production quota breaches and the more complicated soup cooked up by Russia to hide its own mathematical tolerance of oil production and reporting, the leaked threat by Saudia Arabia that the current total of 2.2mbpd cuts will be unwound by October or November means a bearish mien is more than justified.

Yet it is worth at least a mental wrestle where such abundance of cartel oil necessarily guarantees oil or more widely, energy security. The International Energy Agency, long-known for its anti-fossil fuel ways does not think so. While not recanting a relentless interest in alternative energies, its warnings concerning security of energy supply encompasses similar problems faced by traditional means of energy production. The chief of the IEA while hosting the Summit for the Future of Energy Security in London last month spoke to ‘The National’ of the UAE. Fatih Birol mused and expounded on challenges to energy supplies as well as increasing problems of securing mineral assets. His opinion was largely based around the lack of global cohesion within energy and while careful not to point fingers, he bemoaned “increased geopolitical fragmentation,” how “directional winds were against international cooperation,” and warned, “no country is an energy island […] a country alone cannot solve this energy problem”. Such language does not need a digit of accusation, the United States is the cause for trade and energy anxiety at present and while its foreign policies do have political aim, the manner and application of process and pressure is at worst unfathomable and at best veiled when married with the tariff policy.

Currently, the US Administration has embarked on a campaign of ‘maximum pressure’ on almost opposite sides of the world’s atlas. Little less than regime change will do within Venezuela and for those who envisaged Trump II to be a period of ‘unfinished business’, they would be proved prescient judging by the enmity the US President holds for his Venezuelan counterpart, Nicolas Maduro. The Donald has driven a sanction battering ram through production concessions granted to US oil companies operating in the South American country under Joe Biden, and when those current licences run out, some as early as this month, over 600kbpd will be taken from the seaways of oil supply. Two continents and eight time zones away, Iran is also feeling the heat from the long memory and vengeful nature of Mr Trump. Whatever the argument for Iran to have nuclear capability is moot, the US is coming sometime soon, and Iran’s oil will disappear from international markets no matter how the feints of recent diplomatic meetings are translated as constructive.

It is a mathematical and conspiratorial convenience when taking the sum of Venezuela’s 600kbpd and Iran’s 1.6mbpd of exports and neatly totalling them to the 2.2mbpd possible future return of OPEC+ oil. But the hateful term of a ‘net sum zero’ is never, ever correct and in this situation forgoes the current state of the world’s economy which will indeed have repercussions of less oil demand in the short to medium-term because of trade wars and the risk of reduced oil supply because of low prices and investment. The viability of shale and fracking production in the United States is constantly reviewed particularly when some wells are now depleted of first strike production and secondary drilling is close at hand. US production requires continued maintenance and top up; it loses the equivalent of Norway’s production every day. This then means rolling investment and with an oil future beset with trade wars, tariffs and possible lower prices it is questionable whether such investors will be keen to roll their oil dice. As seen in Energy Intelligence, Barclays forecast North American upstream investment will fall 10-15 percent this year while the rest of the world will see a decrease of 5 percent. Envisage then a lack of investment, a reduction in oil production that coincides with a world seeing further and maintained conflict in oil sensitive areas. Oil prices are indeed set to travel lower, however, with supply security not only now threatened by conflict but by reduced investment, those that are getting comfortable with freefalling oil prices might just be wise to shift a little in their seats.  

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