Donald Trump’s attack on Iran may cancel out trade war's impact on oil prices

  • The prices of crude oil were subdued before the US strike on Iran, that escalated tensions in the Middle East.

  • Many blame Trump for the eight year low in oil demand - as an effect of the trade war he started with China.

  • All that changed today when the crude oil prices spiked by 4% ⁠— with no change in demand and no signs of trade war ending.
Before US President Donald Trump ordered a strike on Iran which killed its military leader Qassem Soleimani – the prices of crude oil were subdued. In fact, most researchers believed that crude prices will hover around $60 a barrel for the next few years – thanks to the slowdown in the global economy.

Now, the global demand for oil is growing by only a million barrels per day which is at an eight-year low. Many blame Trump for the low demand as an effect of the trade war he started with China. All that changed today when the crude oil prices spiked by 4% ⁠— with no change in demand. There are few signs of Trump ending the war with China ⁠— while imposing tariffs on France.

If not for Soleimani’s death, crude oil price charts would have wobbled within a tight range. “We expect crude oil prices to remain muted and range-bound in the near term, as the proposed additional cuts by OPEC cartel for the first quarter of 2020 will fall short of providing the desirable balance to the global oil market,” said a report by Kotak Securities on December 27.

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The rise of non-crude options

New and emerging trends also have been bringing down crude oil consumption. Many countries, including China and India – who are heavy crude consumers – are making the shift to cleaner and greener natural gas. More importantly, world over, the production of electric vehicles has reached scale which means batteries are becoming cheaper. That would have a direct impact on crude consumption.

The situation was so bleak that Saudi Arabia, the world’s largest producer of crude oil, reluctantly took a voluntary production cut by 0.4 million barrels per day. The all-powerful OPEC cartel ⁠— with 15 nations including Iran and Iraq ⁠— too decided to cut production by 1.7 million barrels per day for three months.
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US oil production growth

The only country whose oil production has remained ‘robust’ does not belong to the oil cartel - the United States. In 2018, the country increased its production after high prices of crude in 2018 at around $71 per barrel. Today, it produces a tad over a million barrels per day.

As per the estimates of two energy agencies – International Energy Agency (IEA) and Energy Information Administration (EIA) US production will increase by another million barrels a day. It means the US is gearing up to double its energy production.

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And non-OPEC production that includes US, Norway, Canada, Brazil and Guyana will grow by over 2 million barrels per day.

The trade wars seem to be paving the way for a new cartel of oil producing nations, which can only gain power as US moves its grip from Iraq to Iran.

This is also not the first time that the US has been blamed for starting a war over oil. Their strikes on Iraq war in early 2000s was called Operation Iraqi Liberation which is the acronym for OIL, something that Pentagon has written off as a coincidence.

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