Crude Oil falls below $61 as trade war escalates

Crude oil prices suffered huge losses yesterday amid the escalation of the trade war between the US and China despite the “sabotage attack” against two Saudi Arabian oil tankers near the Strait of Hormuz.

WTI oil price is trading near $61 and Brent at $70 during the European Tuesday’s trading session, well below from the yesterday highs of $63.50 and $72.50 per barrel respectively.

Trade War Escalation: Oil demand under risk

China announced yesterday to raise tariffs on $60 billion of US goods, effective at June 01, in retaliation for US decision last Friday to raise its own tariffs on $200 billion in Chinese imports and possibility of imposing duties of up to 25% on a further $300 billion worth of imports from China next weeks.

Both Crude Oil contracts and Global Equity indices hit hard yesterday on the escalation of the trade war between the two largest economies of the world, putting in risk the global growth and the solid fuel demand. Market has recovered some losses during this morning after US President Trump said that he expects trade negotiations to be successful and he is planning to meet with Chinese President Xi in June during G20 summit, rising the hopes for an agreement. The fact that the Chinese tariffs will be implemented at June 01, almost 15 days away from now and plenty of time to finally found an agreement as the trade talks haven’t collapsed according to US Secretary Mnuchin and White House economic adviser Larry Kudlow

“Sabotage Attack”: Oil supply under risk

During the early US Monday session, the WTI and Brent crude oil contracts moved higher near monthly highs of $63.50 and $72.50 per barrel respectively following reports for a “sabotage attack” against two Saudi Arabian oil tankers which were reportedly attacked off the coast of the United Arab Emirates (UAE) on Sunday, near the Fujairah port (one of the world’s largest bunkering hubs) and very closed to the Strait of Hormuz in the entrance of the Persian Gulf.

The Strait of Hormuz, which is a tiny waterway passage-only 21 miles wide, touching Iran on north side and Oman-UAE on the south side , is the world’s most important crude oil chokepoint and geopolitical significance, as it connects the oil rich countries of Persian Gulf to the outside world without alternative export oil route. Around 40% or near 20 million barrels of the world’s traded crude oil is transported through the straits, especially the majority of oil exports of Saudi Arabia, Iraq, Iran, Kuwait, Bahrain and the significant LNG-Liquid Natural Gas exports from Qatar.

The risk for a new supply oil disruption in the already tight oil market due to the lower oil exports from Venezuela, Iran, North Sea, Libyan civil war and OPEC+ cut deal , is rising as the Iran is threatening to block the Strait of Hormuz as a negotiation weapon against the US sanction on its oil exports. US government already sent the 5th Navy Fleet to the Persian Gulf to guarantee the normal shipping activity of the Straits and calm the market fears from the Iranian threats.

Technical Picture:

WTI price failed to continue above $63 yesterday, retracing back to the current support level of $61, showing weak signs and putting under threat the very important psychological level of $60.

If sellers manage to drop the price below $60, then it will open up a slippery slope of the contract towards the lows of $55-$58, supported from the trade war tension.

Otherwise, possible escalation of the Persian Gulf tension will give upward support to the oil price testing once again the $63 area, absorbing all the selling pressure from the trade war negative sentiment.

by Vrasidas Neofytou, Head of Brokerage and Head of Commodity Strategy at Exclusive Capital