Oil rose towards $70 a barrel on Monday, boosted by a fall in drilling activity in the United States and the risk of an intensifying global trade war sparked by President Donald Trump.
U.S. drillers cut seven oil rigs in the week to March 29, bringing the total down to 797, the first decline in three weeks. The rig count is closely watched as an indicator of future U.S. oil output.
Prices also found support amid prospects of a harder U.S. line against Iran following recent criticism by Trump who threatened to pull out of a 2015 international nuclear deal with Tehran under which Iranian oil exports have risen.
Luqman Agboola head of energy and infrastructure at Sofidam Capital Ltd said the implication of the lower rig counts is reduction in supply which will increase the demand for oil and higher oil price although it’s not sustainable.
Agboola added, “Irrespective of what caused the decrease in rig count the market will react, however what is driving the oil price which is not visible is the Iran nuclear deal.”
“By next month, the US is expected to revalidate the deal but Trump has vowed not to revalidate and is currently consulting with the European superpowers majority of which are the highest consumer of Iran’s oil.”
Trump has given the European signatories a May 12 time limit to “fix the terrible flaws” of the deal. If the U.S. were to pull out of the deal and re-impose economic sanctions on Iran it could impact the oil output of one of OPEC’s largest members.
Abayomi Fawehinmi an energy expert says all the current scenarios will lead to a short run increase in oil prices.
Oil has risen from a multi-year low near $27 in January 2016, helped by production cuts led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia, which started in 2017 and is due to run until the end of 2018.
The revival in prices has helped to support a surge in U.S. drilling, which has boosted U.S. production to a record 10.43 million barrels per day (bpd), taking it past top global exporter Saudi Arabia.
Russian oil output rose in March despite the output deal, to 10.97 million bpd from 10.95 million bpd in February, Russian Energy Ministry data showed, putting Russia ahead of the United States as the world’s biggest crude producer.
Also potentially weighing on markets were rising trade tensions between the United States and China.
“The current US and china trade war will cause distortion if it persists for a long period of time which will overtime lead to reduction in oil price,” Agboola said.
“If America continues with its imposition of tariff; Chinese output will reduce which will reduce the demand for energy,” Agboola concluded.
China is showing the United States that it will make good on its trade threats; the Chinese government said that tariffs on about $3 billion worth of US imports are going into effect Monday, hitting 128 products ranging from pork, meat and fruit to steel pipes.
It’s the latest move in escalating tensions between the world’s two largest economies, which some experts fear could turn into a global trade war.
Beijing says the new sanctions on 128 US products, which it first proposed 10 days ago, are in response to President Trump’s tariffs on imports of steel and aluminium from China and some other countries.
But Trump also has more measures in the works aimed specifically at China. He has announced plans to slap tariffs on about $50 billion worth of Chinese goods following an investigation by his administration into the theft of intellectual property from US companies.
The administration has said those tariffs will punish the Chinese aerospace, technology and machinery industries, but it hasn’t announced which specific products will be hit.
The IMF, along with a long line of economists has warned that protectionism poses a grave risk to the global economy. Meanwhile, the Trump administration exempted a series of parties from the previously announced steel and aluminium tariffs, including the EU, Argentina, Australia, Brazil, South Korea, Mexico and Canada.
OPEC and 10 members outside the cartel, including Russia, have been holding back crude production by 1.8 million barrels a day since the start of last year, as part of an effort to rein a global supply glut and boost prices.
The price of Brent crude, Nigeria’s benchmark grade, fell 0.14 per cent to $69.92 per barrel Monday, according to Bloomberg data; although still less than its 2018 high of $71.28 reached on January 25.
DIPO OLADEHINDE
