Why Did Oil Prices Weaken Recently?

The road to higher oil prices will be paved through peace. 

It’s true, although it doesn’t seem accurate at first. After all, we saw WTI prices weaken yesterday and fall below $62 per barrel once President Trump announced that the U.S. was in serious negotiations with Iran and inching closer to a deal. 

So why would that weaken crude prices? 

Think of it like this… if Iran and the U.S. come to a long-term peace deal, President Trump would most likely lift the sanctions that have been placed on the country’s oil industry. 

In that event, Iranian crude would no longer have to be smuggled through places like Malaysia. Although this move alone wouldn’t necessarily bring a flood of new supply onto the market — remember, that crude is already being sold at a discount on the black market — Iran’s exports on paper would climb as much as million barrels per day. 

Why would this be the case? Well, that perceived addition to global supply if a deal is struck would put downward pressure on crude prices, which makes sense since it would mean more barrels to feed the healthy demand growth taking place, right?

Once the trade wars that President Trump unleashed are resolved and we start seeing more deals signed in the coming weeks and months, all of those bearish demand forecasts will be revised as the world GDP growth jumps over 3% (right now it’s pegged at 2.8%).

Anything’s possible, dear reader, but I’m not entirely convinced. 

When a top Iranian official said that Iran was committed to getting rid of its highly enriched uranium and only enrich its uranium to lower levels, the real question to ask is this: How desperate is President Trump?

Spoiler: He’s not… or is he?

If you take a look back at President Trump’s history with U.S.-Iranian nuclear deals, he’s made his position pretty clear. During his first administration, he lambasted President Obama’s Join Comprehensive Plan of Action (JCPOA) deal, 

I believe his exact words were, “the Iran deal was one of the worst and most one-sided transactions the United States has ever entered into.”

One would expect that any potential nuclear deal today would eliminate Iran’s ability to enrich uranium. Keep in mind that that the International Atomic Energy Agency (IAEA) has already said that Iran has enriched enough weapons-grade uranium for six bombs. 

And if stopping enrichment is completely off the table, as Iran’s Foreign Minister as explicitly said, then it’s a matter of much President Trump is willing to capitulate — another reason to think we’re nowhere close to a deal. 

Of course, the latest rumors of a deal being close at hand doesn’t take into account how Israel will respond. 

But here’s the interesting part…

Bringing Iranian crude back off the black market means that China will have to pay more. As it stands now, Chinese refineries are enjoying a nice discount from global price benchmarks by buying as much sanctioned oil from Iran and Russia that they can get their hands on. 

Once the oil stops flowing into those shadow tankers, crude prices will rise — count on it. 

How Trump’s deal with Iran plays out isn’t the only catalyst for oil, too. Iran is just one piece of the geopolitical volatility that could send crude prices higher this summer. 

We’ll dive into that looming peace deal next week.