PETROANALYSIS || ARTICLE
Oil in 2018: Prices, fundamentals, geopolitics and financial markets (Part 2)
2. Geopolitical factors.
2.1. Greater commercial tensions.
2018 has been characterized by the increase in commercial tensions between the United States and China. In this regard, the US government imposed tariffs equivalent to USD 200 billion on Chinese imports over a wide range of products, which led to similar measures in retaliation by the Asian country. The intensification of these commercial tensions has increased the geopolitical risk, has weakened the climate of optimism about global growth and has caused greater volatility in the financial and currency markets, impacting the price of financial assets and commodities.
2.2. The reimposition of sanctions on Iran by the United States.
The Government of Washington unilaterally abandoned the international nuclear agreement signed in July 2015 by Iran and the G5 + 1, composed of Russia, China, the United Kingdom, France and Germany. This means that the United States reinstated the penalization of trade in gold, precious metals and others. It reimposed sanctions on Iran’s auto sector and banned financial transactions related to the railroad system.
In addition, from November 4, the rest of the prohibitions associated with the sale of oil and financial transactions with the Central Bank of Iran will be implemented. In this sense, many foreign companies have announced their desire to leave the Iranian market, especially because of the uncertainty in the energy and financial sectors.
Meanwhile, in relation to the oil market, US sanctions are already limiting Iranian crude exports, which is impacting unfavorably on the global supply of this product. With regard to this, Iran’s exports fell to their lowest level in two and a half years before the announced measures against the oil sector came into force.
According to Bloomberg reports, shipments of crude oil and condensate decreased to 1.72 mbd in September, which represented a decrease of 260 thousand barrels per day, compared to the previous month. On the other hand, shipments of crude oil and condensates fell by 1.1 mbd, which represented a contraction of 39% since April.
3. Evolution of financial operations in the oil market.
The increase in trade tensions, the imposition of sanctions on Iran and the normalization of monetary policy in advanced countries are causing abrupt adjustments in the portfolios of international investors. The events described above have led to greater volatility in the currency market and have reduced capital inflows in emerging countries.
With this context in mind, the financial oil markets have not been unaware of these dramatic fluctuations in funds. In this sense, the number of operations carried out (Open Interest) in the oil markets has grown 35% since 2016 and until October 2018. This is a faithful reflection of the growing importance of these as an instrument that allows improving the diversification of the portfolios and optimize the coverage of physical operations in highly volatile markets.
For its part, the rising trend in oil prices could be linked, to a greater extent, to the flows in the financial markets than to the observed in the physical markets. In this way, the net positions traded (short less long positions) have increased 111% between 2016 and 2018. Only in 2018, these transactions have grown 40%, it seems to explain better the rise of crude in this year.
Finally, the rise in oil prices in 2018 could be explained by several factors that include robust demand and the slowdown in supply due to the contraction of OPEC pumping due to the collapse of Venezuela. As described above, the growing commercial and geopolitical tensions have raised the risk premium, and this is all in a context of a significant increase in long purchases in financial markets that have been pushing for an increase in prices.
International Monetary Fund (IMF).World Economic Outlook (WEO), October 2018.
Organization of Petroleum Exporting Countries (OPEC). Monthly Oil Market Report, October 11, 2018.