Brent’s spectacular dive on July 11 wiped $5.46 oﬀ the price of the front-month ICE futures contract — the biggest single-day loss in seven years — and led some to ask if it was the start of an oil price “correction.” We don’t think it was.
While crude was justifiably spooked by the prospect of the US-China trade war spiralling out of control with a new threat from Washington the previous day to levy a 10% tariﬀ on $200 billion worth of annual imports from the Asian giant, it is not enough to upturn the oil market’s tightening supply fundamentals.
The limited spare capacity available with Saudi Arabia, its Gulf OPEC neighbours and Russia looks likely to be stretched thin compensating for the continuing sharp declines in Venezuela, Angola and Mexico in the coming months. That leaves the market vulnerable to the unforeseen but routine major outages in Libya and Nigeria, not to mention unexpected and prolonged shutdowns due to technical glitches and union actions, as happened with the 360,000 Syncrude project in Canada, or could be about to unfold in the oil fields of the Norwegian North Sea.
More importantly, that small spare capacity leaves the market fully exposed to a supply shock on account of Iran if the US adopts a scorched-earth policy of trying to squash the Islamic Republic’s oil revenues to zero.
Yes, major trade wars hurt economic growth, which is a negative for the world’s oil consumption. But it is impossible at this stage to quantify the impact of the US- China tariﬀs battle on oil consumption. Besides, there is a possibility that the two sides return to the negotiating table and the additional tariﬀ threats are set aside.
There is, however, one bearish scenario for oil. It’s a wildcard for now but one to keep an eye on: the US and Iran might agree to talk. If a compromise is found on moving Iranian and Hezbollah troops away from Syria’s border with Israel during the Trump-Putin summit next week, it could pave the way for talks between Washington and Tehran. Trump this week again indicated he was open to the idea.
But if the US sanctions proceed as planned and the trade tensions subside, the OPEC/non-OPEC combine might be struggling to keep the world supplied by the end of 2018, the polar opposite of where the producers began the year.
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The shift from coal to natural gas marked a significant change in the energy sources used to generate electricity in the United States in the past decade. This shift was driven primarily by the sustained low natural gas price. In 2020, natural gas prices were the lowest in decades: the nominal price of natural gas delivered to electric generators averaged $2.37 per million British thermal units (Btu). For 2021, EIA forecasts the average nominal price of natural gas for power generation will rise by 41% to an average of $3.35 per million Btu, about where it was in 2017. In contrast, EIA expects nominal coal prices will rise just 6% in 2021.
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