While crude oil has weakened due to US-China trade tensions, Iranian provocations are increasing risk to crude supplies, warns Phil Flynn.
A trade war tit for tat is overshadowing bullish fundamentals for the crude oil market, even with evidence that Iran detained another oil tanker over the weekend. Trade war fallout is shaking down the oil market as China lashes back at the United States. After President Donald Trump threatened to slap China with an additional 10% tariff on Chinese goods, China has ordered its state-owned enterprises to suspend imports of all U.S. agricultural products. On top of that, the People's Bank of China set its daily reference rate for the Chinese yuan at 6.9225, the lowest rate since December.
The People's Bank of China (PBOC) attributed the weakening of the currency beyond 7 yuan per U.S. dollar to many factors including measures of unilateralism and protectionism, as well as the expectation of additional tariffs on Chinese goods. "The PBOC has the experience, confidence and capability of keeping the yuan's exchange rate basically stable at a reasonable and balanced level," the PBOC said. Of course, investors in China have to be worried. This obviously breaks World Trade Organization (WTO) rules and could cause a flight of capital out of China. The move will undoubtedly inspire tougher U.S. sanctions. More than likely, the 10% tariff that was previously announced will go to 25%. There may be also new crackdowns on Chinese technology companies. The turmoil and the fear will shake things and the market may overreact, but it should find its stability in a matter of days.
Did you ever think you would see the day where Iran seized a tanker and it is not the top story in The Energy Report? Well today is that day. Reuters reported that Iranian Revolutionary Guards seized an Iraqi oil tanker in the Gulf which they said was smuggling fuel and detained seven crewmen. Iran’s state media reported the seizure on Sunday, in a show of power amid heightened tension with the West. The Iranian provocation is taking a backseat to other news that is still bullish for oil. There is a real risk premium that will be built in. Yet trade war fears are having people give in to fears of slowing demand and seasonal weakness may be offset by continued U.S. crude draws. Saudi Arabia has lowered its price to Asia to pick up some market share.
Natural gas is still in trouble. A big August cool down in the south should allow supply to grow at a hefty pace. Yes, natural gas can go lower and it more than likely will.
Contact me to get my daily trade levels and updates on all major markets at pflynn@pricegroup.com.
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