Oil prices---Tug of War: Sanctions vs. Trade War

(edited)

Oil markets stand at a very interesting junction. Prices can go anywhere from here. I believe that we might be overestimating the effect of sanctions as there are many other factors to consider in it: 49% of Iran's oil exports go to China and India--both are not going to agree for cutting their imports. Also, we still have to see the response of the Iranian regime and that of EU, accounting for 20% of Iran's oil exports, which is also trying to salvage the Iran deal.

On the other hand the effect of a trade war is quite clear....

Here is my latest on oil markets:

The Two Factors To Watch In Today’s Oil Markets---https://oilprice.com/Energy/Crude-Oil/The-Two-Factors-To-Watch-In-Todays-Oil-Markets.html

Cc: @Tom Kirkman, @William Edwards, @Jan van Eck, @Dan Warnick.

Edited by Osama
Have to mention more names.
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Nicely written article, Osama.  2 key topics covered, in a rational and level-headed analysis.  

And I hadn't realized that you were a contributing writer for Oil Price.

An addition point that I would like to note, regardless of geopolitical disputes, is that if oil prices rise too high, demand will eventually reduce, and oil prices will sunsequently reduce.  Here's my thread from a couple months ago, title is self-explanatory:

Hey Oil Bulls - How Long Till Increasing Oil Prices and Strengthening Dollar Start Killing Demand in Developing Countries?

And I had updated the thread earlier today, it seems that higher oil prices have already cut into demand:

"But the slowing of demand can’t simply be chalked up to statistical idiosyncrasies. Higher oil prices – Brent was up roughly 45 percent – have started to impact consumption. In the U.S., demand growth halved from the first to second quarter of this year."

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3 hours ago, Tom Kirkman said:

Nicely written article, Osama.  2 key topics covered, in a rational and level-headed analysis.  

And I hadn't realized that you were a contributing writer for Oil Price.

An addition point that I would like to note, regardless of geopolitical disputes, is that if oil prices rise too high, demand will eventually reduce, and oil prices will sunsequently reduce.  Here's my thread from a couple months ago, title is self-explanatory:

Hey Oil Bulls - How Long Till Increasing Oil Prices and Strengthening Dollar Start Killing Demand in Developing Countries?

And I had updated the thread earlier today, it seems that higher oil prices have already cut into demand:

"But the slowing of demand can’t simply be chalked up to statistical idiosyncrasies. Higher oil prices – Brent was up roughly 45 percent – have started to impact consumption. In the U.S., demand growth halved from the first to second quarter of this year."

Thank you for these encouraging words!

You have made a very valid and evident point here. The demand was, is and always will be the main driver !

 

In the longer run --- how do you see Aramco's IPO effecting the price? Or is it going to happen or not?

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Good article Osama ! I think the markets have overestimated the impact of the US oil sanctions on Iran and underestimated the impact of the trade wars. If I'm right the current bullish trend could be replaced by a bearish trend in the coming months. 

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23 minutes ago, Osama said:

 Thank you for these encouraging words!

Keep writing : )   You covered valid points in a professional manner in your article.  Well done.

 

23 minutes ago, Osama said:

In the longer run --- how do you see Aramco's IPO effecting the price? Or is it going to happen or not?

4 months after I wrote this below, I still think the Aramco looks unlikely.

 

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1 hour ago, Tom Kirkman said:

Keep writing : )   You covered valid points in a professional manner in your article.  Well done.

 

4 months after I wrote this below, I still think the Aramco looks unlikely.

 

All of your points are valid. However, if in case MbS is serious about the NPT and Saudi Vision 2030---he might need the money from Aramco's IPO---even though it might not get the anticipated or reported valuation.

I personally believe that Aramco's IPO is a sort of anchor....an event ...one of the most important factors holding the Vienna accord in hand and therefore the oil prices. If, as you say, it looks unlikely....the prices can fall precipitately. But as always once can deny this thought quite easily as there are other reasons for having a stable oil price as well.

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9 hours ago, Osama said:

Oil markets stand at a very interesting junction. Prices can go anywhere from here. I believe that we might be overestimating the effect of sanctions as there are many other factors to consider in it: 49% of Iran's oil exports go to China and India--both are not going to agree for cutting their imports. Also, we still have to see the response of the Iranian regime and that of EU, accounting for 20% of Iran's oil exports, which is also trying to salvage the Iran deal.

On the other hand the effect of a trade war is quite clear....

Here is my latest on oil markets:

The Two Factors To Watch In Today’s Oil Markets---https://oilprice.com/Energy/Crude-Oil/The-Two-Factors-To-Watch-In-Todays-Oil-Markets.html

Cc: @Tom Kirkman, @William Edwards, @Jan van Eck, @Dan Warnick.

Nice work, Osama. The factors that you mention are certainly significant inout to the speculative community and, in the short term, can influence prices as the longs add net positions to their speculative holdings. I might add a cautionary note, however. Speculative futures positions are a net sum game. No oil is consumed. Therefore what goes up must come down.

The current fervor for higher prices cannot be sustained. In fact, if you look carefully, you will note that the stated reasons for upward price moves happen AFTER, not before the fact. It is called "jumping on the bandwagon" or "the trend is your friend". Further, the wholesale adoption of the industry which bases its thinking on the premise that "if production equals demand prices will rise" has no basis in history. For proof, take an objective look ash the relationship between price movement and inventory accumulation during the 2014-2016 time frame. Prices fell dramatically while production struggled to keep up with demand in 2014. After pieces collapsed production significantly exceeded demand while prices slowly recovered. Speculative enthusiasm moves prices -- a balanced supply/demand picture does not.

My expectation is that, at some point, the accumulation of speculative long positions, which were accumulated during the "production cut" era, will be liquidated, with a resounding drop in price. AFTER the price drops, not before, the media will report on either the overproduction or the undersupply as the cause, when the real reason is "what goes up must come down".

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seems to me that speculation has suddenly taken on an entirely new atmosphere largely because of Trump's unpredictable moves that are not strategic. Look at the lira and the sudden sanctions on Turkey. Everything's so ... sudden lately, and no one can keep up and it's wreaking havoc on markets. 

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20 hours ago, Guillaume Albasini said:

Good article Osama ! I think the markets have overestimated the impact of the US oil sanctions on Iran and underestimated the impact of the trade wars. If I'm right the current bullish trend could be replaced by a bearish trend in the coming months. 

Thank you!

Yes....I agree and...there are reasons for this: replacment of bullish trend!

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15 hours ago, William Edwards said:

My expectation is that, at some point, the accumulation of speculative long positions, which were accumulated during the "production cut" era, will be liquidated, with a resounding drop in price. AFTER the price drops, not before, the media will report on either the overproduction or the undersupply as the cause, when the real reason is "what goes up must come down".

Thank you Mr. Edwards!

 

The quote above says it all....and I have been reading that traders have started to jettison long bets due to the ongoing and expected uncertainty.

 

I have this silly thought regarding oil prices in the short term: Oil prices will take a little dip due to trade war, it already has ...it might take a little more. After that the traders will start playing on the Sanction sentiment pumping up the prices (I see WTI crossing $70 before November 4th). And when, as you said they'd realize that all of this was based on sentiments...they'd liquidate. And prices will come down. 

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This requires discussion...please share your views on the following.

Some good analysis on Iranian sanctions---https://www.bloomberg.com/view/articles/2018-08-12/trump-s-iran-oil-sanctions-will-hurt-more-than-you-think

The first U.S. sanctions have been reimposed on Iran with little sign of either side softening its position. Curbs on oil exports will follow in early November and the effect will be bigger and swifter than last time around. Oil forecasters don’t seem to have grasped that yet.

....but it’s companies, not governments, that buy Iran’s oil. The threat of exclusion from the U.S. market and banking system is enough to stop them buying it, international shipping companies from moving it and insurers from covering that trade.

 

 

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I am beginning to think the high value of the $ is acting as a brake on higher oil prices due to it cutting demand so the actual price of oil is a lot higher for countries whose currency has devalued vs the $

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On 8/13/2018 at 5:43 AM, Osama said:

I personally believe that Aramco's IPO is a sort of anchor....

Aramco can raise a lot of money on the bond market to offset much of the fiscal impact of a 5% float of Aramco. But it can’t go public.

If you have ever worked for a large western publically traded corporation, and been a part of Aramco, well, if you have both perspectives you just can’t see how Aramco can be public. Aramco isn’t just secretive to the outside world, it’s secretive to itself. And it decives itself.

borrowing money to infuse a money hemorrhaging operation like Sabic is going down the wrong business path, but perhaps good internal politics of Saudi Arabia path. MBS, please put the money elsewhere. Most Aramco JVs have a poor track record. Sadara is a fiscal fiasco too.

Aramco as an oil producer, I have no fundamental concerns. It can crank the barrels out. If MBS wants to see how to run a sovereign wealth program based on oil revenues look at Norway, and appreciate how long it’s taken to get where they are.

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