Trump Is Spooking Oil Markets More Than Iran

(Bloomberg Opinion) -- Time was when geopolitical tensions in the Middle East would light a fire under oil prices, even if they didn't immediately affect prospects for supply. Now, it's threats to demand that send shock waves through oil markets. And there may be more of those to come.

A spate of tanker attacks, drone downings and saber rattling around the Strait of Hormuz has had little impact on oil prices. Perhaps oil traders don't believe that the world's most important oil chokepoint will really be closed to tanker traffic – a sentiment I share. The seizure of the tanker Stena Impero is a particularly British problem and we are unlikely to see a growing fleet of foreign ships impounded off Iran. While the harassment of vessels using the waterway may continue, more serious escalation is unlikely – at least without further provocation.

In contrast, a tweet from President Donald Trump that he would impose “a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China” was enough to send oil prices into a tailspin. U.S. benchmark West Texas Intermediate crude fell by as much as 4% in the 15 minutes after the tweet and ended the day down almost 8%.

Those additional tariffs and the ones already imposed are creating headwinds for 100 million barrels a day of global oil demand. That's a much bigger worry than threats to disrupt crude flows through the Strait of Hormuz, which are around a tenth of that volume, according to tanker tracking data compiled by Bloomberg.

The International Energy Agency, whose forecasts are closely watched by oil traders and analysts, has been slashing  its oil demand growth estimates for the first half of 2019. At the beginning of the year, the agency saw pretty consistent growth at a little over 1.4 million barrels a day, with the first half looking slightly stronger than the second. Over the next six months that picture changed dramatically. Estimates of demand growth for the now-finished first half of the year have been cut to just 560,000 barrels a day, while the forecast for the second half has surged to almost 1.8 million. 

The IEA points to “expected stronger economic growth in the OECD” and the fact that oil prices are lower than they were a year ago to support its stronger second-half forecast. But that is unlikely to last.

Crude oil prices may indeed be lower than they were last year, but that's not much help to motorists in Europe. Weaker currencies and inflexible taxes on gasoline mean that the prices drivers are paying at the pump are within a whisker of where they were last year. That's not going to stimulate much new demand. Pump prices in the U.S. are only around 10 cents a gallon lower than a year ago and gasoline demand is running below last year's level, according to data from the U.S. Energy Information Administration.

The July report also notes that “the forecast assumes that the trade standoff between China and the U.S. does not deteriorate over the coming months.” It just got a whole lot worse.

One area where demand has been strong is petrochemicals, a segment of the oil market that is seen as a key driver of growth in the years ahead now that the transport sector faces headwinds from electric vehicles and ride-sharing. But here too there are worrying signs. BASF SE, the world's largest chemical company, issued a profit warning last month, while Royal Dutch Shell CEO Ben van Beurden noted a “synchronized recession” in petrochemicals leading to “massive destocking” in the supply chain. That's not going to help demand in the coming months.

It may be too soon to expect a big cut in the demand growth forecast in the IEA's next report, due Friday, but it will almost certainly come in due course – unless political leaders in Washington or Beijing blink, which seems unlikely.

While the world's oil producers continue to struggle with over-supply, any signs of demand weakness are going to have a disproportionate impact on prices.

To contact the editor responsible for this story: Stephanie Baker at stebaker@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

©2019 Bloomberg L.P.