So, the steady growth in oil prices, which we have seen since the end of December 2018, has been broken. For more than two weeks now, the price of oil has been falling, and this despite the tough US sanctions on Iranian oil and the cessation of supplies from Libya and Venezuela. Instead of celebrating the victory and expecting further price increases, the oil bulls are rapidly сlosing their positions.
The analytical department of FortFS examines in details how does the US oil embargo “work” and what world events accompany this trade policy.
First of all, the US sanctions policy clearly does not aim to reduce global oil supplies to the world market. It is this conclusion that we can draw from Trump's call for an increase in Saudi Arabia’s oil production in order to compensate the under-received volumes of Iranian oil. Apparently, the goal of the United States is to block the sale of Iranian oil, but at the same time to prevent a shortage by supporting the supply of oil from other regions. Thus, the US sanctions policy on Iranian oil does not push prices up, as many traders believe, but, on the contrary, contributes to a decrease in world oil prices.
Secondly, it became obvious that Iran continues to quite successfully sell its oil, bypassing sanctions! Iran’s cessation of the use of the US dollar for payments for oil deals makes it difficult to track contracts. Iranian tankers switch off transponders and actually become unidentified. Oil transfer takes place in neutral waters from “unidentified” tankers to tankers of other states, which at the same time do not formally violate the embargo. Also, it becomes apparent that Iran is finding more and more new oil sales schemes. An important conclusion is that the demand for Iranian oil has not fallen, and in fact we can see the sabotage of US sanctions by a number of countries. Thus, it is possible to make the assumption that the total volume of oil supplies to the world market did not fall and could even increase.
Thirdly, despite the fact that in recent months, OPEC + participants faithfully fulfilled the conditions to reduce production, and oil supplies from Venezuela and Libya were interrupted as a result of political upheavals, these factors are clearly not enough to support oil prices. Even with these reductions, the average projected oil supply in 2019, taking into account the development of the global economy, will exceed demand by about 1 million barrels per day. Sooner or later, Libya and Venezuela will also resume oil sales in maximum volumes to restore their depleted state budgets.
In addition, China openly declares that it will increase purchases of cheaper oil from Iran, and given the tense opposition between the US and China, this trend may be accelerating now.
Thus, we can conclude that the market has already digested long time ago all the news about the success of the OPEC deal, sanctions on Iranian oil, cessation of supplies from Venezuela and Libya, etc. These factors have already exhausted the potential to drive growth further and the market needs new information to maintain the oil rally. Accordingly, it can be assumed that until such information appears, prices will continue to decline.
The next meeting of OPEC + will be held in June, and in the current realities, the slightest hint at the termination of the agreement could provoke a collapse in oil prices.
Accordingly, today we can conclude that the risk profile of oil-related instruments is shifted towards lower boarder rather than upper one.
Gold, being primarily a protective asset in the world of finance, reacts sensitively to any crisis and reflects the level of investor fear. The higher the level of fear, the faster the price of gold rises. However, in case of a steady fall in oil prices, gold may also fall in price. The fact is that the decline in oil prices does not always mean a crisis of the economy. Of course, we can sometimes consider a steady decline in energy prices as a sign of a decrease in the region’s industrial and transport activity and, consequently, as a slowdown in the economy. However, this is not always the case; for example, lowering the price of oil and gas can reduce the costs of many industries, such as air carriers, equipment manufacturers and other energy-intensive enterprises. That is why the shares of such companies often rise with a steady decline in energy prices. Accordingly, if the decline in oil prices is accompanied by an increase in global stock indices, we can assume a possible decline in prices of yellow metal. Therefore, if you are trying to trace the relationship between the prices of energy and gold, it is important to understand the medium-term trends on local stock markets and the position of the dollar in relation to major world currencies. Indeed, at the end of the day, all calculations are conducted in US dollars and oil and gold prices are also denominated in dollars.