Oil rises as U.S.-Iran tensions counter concern over trade spat

By Sharon Cho and Grant Smith on 7/23/2018

SINGAPORE and LONDON (Bloomberg) -- Oil rose to near $69/bbl as flaring tensions between the U.S. and OPEC member Iran countered growing concerns that trade protectionism will harm economic growth.

Futures added 1% in New York following a third straight weekly decline. President Donald Trump, whose administration is seeking to choke off Iranian crude exports, warned the Islamic Republic of grave “consequences” if it threatens the U.S., after his counterpart Hassan Rouhani issued his own warning against any U.S. aggression. Industrial action halted work at three North Sea oil and gas platforms operated by Total, adding to supply concerns.

"You have a combination of factors for the more constructive mood on the market, including an escalation of rhetoric between the U.S. and Iran that inflates the geopolitical risk,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London. He added that the strike at Total’s North Sea facilities "helps" contribute to the bullish sentiment.

Oil in New York has retreated about 9% from the three-year peak reached earlier this month, on concern that the escalating trade conflict between the U.S. and China will damage economic activity and depress demand for fuels. That’s offsetting a range of supply risks, from Libya to Venezuela and the looming American sanctions on Iran.

West Texas Intermediate crude for September delivery traded at $68.93/bbl on the New York Mercantile Exchange, up $0.67, in London. The August contract, which expired Friday, closed 1.4% higher at $70.46/bbl. Total volume traded was about 44% below the 100-day average.

Brent for September settlement added $0.97 to $74.04/bbl on the London-based ICE Futures Europe exchange. Prices fell 3% last week. The global benchmark crude traded at a $5.12 premium to WTI.

Rouhani warned the U.S. on Sunday that conflict with Iran would be the “mother of all wars,” and to stop pursuing hostile policies against the Persian Gulf state including threatening its oil exports. The previous day, Ayatollah Ali Khamenei made a reference to disrupting flows through the Strait of Hormuz, the world’s most important oil choke-point.

Trump responded by saying “NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE,” in a Twitter post.

“It is most certainly not an environment where selling seems to be the best idea,” Ole Sloth Hansen, head of commodity strategy at Saxo Bank in Copenhagen, said of the U.S.-Iran tensions. “The market is so far seeing this as a war of words, and something that is unlikely to escalate into something that threatens supplies from the region.”

Trade Frictions

As Trump prepares to slap tariffs on $500 billion of Chinese goods, trade dominated discussions over the weekend by finance ministers and central bankers from the Group of 20 nations. The main risks include increasing financial vulnerabilities, heightening trade and geopolitical tensions, as well as structurally weak growth, according to the statement published after their two-day summit in Buenos Aires.

The U.S. oil rig count fell by the most since March, declining by five to 858 in the week ended July 20, Baker Hughes data showed. The decline in rigs came at a time when government data showed an unexpected build in crude inventories in the week ended July 13.

Oil Market News

OPEC is seen raising oil production by about 200,000 bpd through the fourth quarter of this year compared to the second quarter, even with disruptions to Iranian and Venezuelan output, Barclays Plc said in a note emailed July 23. Hedge funds cut their net-long position -- the difference between wagers on a price gain and bets on a drop -- in Brent crude by the most since 2016.

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