This entire week, geopolitics continued to dominate the crude world and its dynamics. Yet, despite all the drama, oil prices were unable to break through the roof. And that is the moral of the ‘crude’ story today.

Markets that were on an upswing at the end of the last week, began to tumble early this week, on signs that the impact of a tropical storm on US Gulf Coast production was short-lived. Chinese economic data dimmed the demand outlook further. Markets also acted swiftly, selling off crude oil, as soon as signs emerged that both Washington and Tehran appeared inclined to ­soften their political ­positions.

Oil prices sank once President Trump and US Secretary of State Mike Pompeo struck a milder tone on Iran. Markets shed a bit more, once Tehran also opted to extend an olive branch to Trump and his administration. Price pressure on the crude markets, however, gained some momentum on Friday, as reports poured in that Iran has seized a British oil tanker in the Strait of Hormuz. The British government said a second, Liberian-flagged vessel was taken as well.

Markets had also strengthened somewhat as reports about the missing UAE tanker MT Riah Emerged which had disappeared from radar earlier in the week, while sailing through Iranian territorial waters in the Strait of Hormuz. Iran’s Islamic Revolutionary Guards Corps (IRGC) later announced that the tanker was being held at its base at Qeshm Island for repairs.

These two incidents sparked fears of fireworks, in and around the crucially important Strait of Hormuz. Some western diplomats were of the view that seizure of the tanker could be an Iranian move to exert diplomatic pressure.

Some reportedly also felt it could be seen as a tit-for-tat reaction to the seizure of the Iranian-owned Grace 1 tanker a fortnight ago by the British Royal Marines off Gibraltar.

All this did was to help strengthen the markets, albeit temporarily. Once Iran indicated it did not seize MT Riah, the pressure was off and the markets went back to normal. Speaking to reporters in New York, the Iranian Foreign Minister Mohammad Javad Zarif dismissed the incident as a routine marine policing matter.

Despite the rising temperature in the wake of these two incidents, markets did not go haywire.

Yes, the prices went up, at least in the immediate aftermath. But it didn’t spike in the real sense.

Many analysts felt geopolitics was already priced into the overall market equation.

But the less intense reaction of the markets towards the ongoing tussle in the oil-rich region, in and around Strait of Hormuz, was also indicative of the new, emerging, ‘crude’ realities. In normal circumstances, this would have been enough to put the oil markets on fire. Not this time.

The shale phenomenon has changed market fundamentals.

There are also other reasons for this calmness. The global economy is slowing - with steep repercussions to the oil and energy markets. Chinese economic growth has slowed down. Its growth rate of just 6.2 per cent in the second quarter of 2019 was the weakest in 27 years. This was enough to rattle crude nerves.

In its recent Monthly Oil Report, the International Energy Agency reported that the global oil supply exceeded demand by about 0.9 million barrels per day (bpd) in the first six months of this year.

“This surplus adds to the huge stock buildups seen in the second half of 2018,” the IEA said. This is a serious challenge to the stabilisation efforts of the Opec.

Fatih Birol, the IEA Executive Director has been insisting in recent days. The monthly report of Opec also confirms that due to the rising non-Opec output, the “call on Opec” will be significantly lower next year. Rising US shale production will exceed additional demand both this year and the next, which means that the market could see a significant surplus in 2020.

Crude demand growth is also under hammer. In its latest Short-Term Energy Outlook, the US Energy Information Agency downgraded its forecast for global oil demand growth to just 1.1mbpd this year, down from the 1.2mbpd it forecasted, just last month.

A host of factors are making the crude horizon a dim read.

Published in Dawn, July 21st, 2019