Monday saw some pretty big news hit the oil markets. Most significant of which was the revelation that China has secretly been buying Iranian oil and using clandestine methods to disguise their tankers from maritime tracking.
While it’s not an entirely surprising development, it still represents a possible tension point between the U.S. and China that could explode in the coming days and weeks.
Aside from geopolitical considerations, sanctions against Iranian oil have helped prop up oil prices. Should these be compromised due to excessive Chinese importing, some analysts have gone on to warn that oil could plummet to as a low as $30 per barrel.
Bank of America Merrill Lynch warned on Monday that oil prices could be cut in half in the future. Although the bank is currently keeping their $60 per barrel price estimate for 2019 and 2020, they are warning investors that they should be prepared for the possibility that oil prices could collapse.
“While we retain our $60 a barrel Brent forecast for next year, we admit that a Chinese decision to reinitiate Iran crude purchases could send oil prices into a tailspin. This decision would both undermine US foreign policy and cushion the negative terms-of-trade effects on the Chinese economy of rising US tariffs,” read a Bank of America Merrill Lynch Global Research report said Friday, warning that prices could sink by as much as $20-30 a barrel in that scenario. “Iran would welcome any opportunity to increase its production whether or not it breaches the terms of the U.S. sanctions, but the strategy there would introduce China to a partner over which it doesn’t have an enormous amount of control,” added Edward Bell, Director of Commodities Research at Emirates NBD.
Shipments of Iranian oil fell below 550,000 barrels per day in June in comparison to 875,000 barrels per day in May, which is already drastically below the 2.5 million b/d figures seen back in June 2018. However, around half of Iran’s exports were shipped to China in recent months as the country continues to sidestep American sanctions.
It came out on Monday that Chinese tankers affiliated with a subsidiary of the China National Petroleum Corporation. Specifically, the Bank of Kunlun, which has a history of being used by both the CNPC and the Chinese government at large as a proxy to avoid getting their hands dirty when they need to engage in shady economics.
At least three Kunlun-affiliated tankers have been spotted interacting with Iranian ships in over recent months.
Overall, prices for crude oil fell further on Monday as traders also took into account the deteriorating demand outlook for the commodity. The latest round of U.S. tariffs could end up reducing global oil demand between 250,000 to 500,000 barrels per day.
Brent crude was trading around $60.94 on Monday, having fallen by 1.5 percent, while West Texas Intermediate was trading around $54.81 and also declined by 1.5 percent during the trading day.
While it’s not going to happen overnight, there’s a strong case to be made that oil could fall back down to the lows seen back in 2018, despite the fact that OPEC has promised to draw the line at the $50 price range.
