Oil fell just short of closing above the $70-per-barrel price required to break out of a trading range it has been in since early July. Prices paused on Friday when news broke that U.S. President Trump is considering imposing additional import tariffs on up to $200 billion worth of Chinese goods. Such a move would be a severe escalation in tensions between the two countries and could damage global trade and negatively affect demand for oil.
Fundamental Picture Remains Cloudy
Oil briefly moved out of its two-month trading range of $65 to $70 but was unable to close above $70 per barrel this week after news broke that President Trump is considering imposing punitive tariffs on Chinese imports. Market concerns about falling Iranian oil supplies ahead of sanctions due to come into effect in November had been pushing oil prices higher previously. This week could see yet another shift in market attention back to the demand side of this oil price tug-of-war.
Oil has been stuck in a $5-per-barrel trading range for two months as the market struggles to decipher which one of two narratives is more important. The first is concerns that a tense trade relationship between China and the U.S. could spill over into a full-blown trade war and tank the global economy, sparking a recession and severe market correction. The other story is that looming sanctions on Iranian oil due to take effect in November will cause extreme global oil supply constraints that could push prices up to $100 per barrel.
The market remains stuck between these two opposing forces, and when one seems to be winning, the other makes an unexpected comeback. The demand side made a comeback on Friday when market rumors of pending punitive U.S. tariffs on such a significant amount of Chinese imports took the wind out of the sails of the oil bulls. Traders will be eagerly awaiting news from the White House to see if President Trump follows through on his latest tariff proposal that could materially slow global economic growth.
OPEC to the Rescue
The global oil supply picture may not be as bleak as some analysts anticipate. Iraq said last week that it is prepared to step up its oil exports as soon as OPEC members agree on how to allocate Iran's production quota among remaining members. The director-general of the Iraqi state-run Oil Marketing Company said his country's exports would reach 3.595 million barrels per day (mb/d) in August, up 1.5% from July.
Iraq's oil industry has come a long way since being decimated by the 2003 U.S. invasion that ousted Saddam Hussein. Data from BP plc's (BP) Annual Statistical Review of World Energy shows that Iraq now makes up 4.9% of global oil supplies compared with 5.4% for Iran. Production growth is also impressive, up 7.7% per annum on average since 2007. Iraq produced 4.52 mb/d in 2017, so exports of 3.595 mb/d would represent 80% of the country's production.
The chart below shows the steady recovery in Iraqi oil production compared with the more volatile Iranian record. Iranian oil production recovered in the wake of the 2015 sanctions relief that came when the country agreed to limit its sensitive nuclear activities and allow in international inspectors. Iran's oil output will be down this year, and it is possible the 5.0 mb/d production in 2017 could be a peak.