Potential Tariffs on U.S. Oil, Supply Disruptions in Libya Add to Crude Volatility

Today’s massive reversal to the upside in August WTI crude oil is further proof that volatile times are ahead. Coming into today session, the market was under pressure as investors continued to raise expectations for an increase in production from OPEC and its major partners at the cartel’s meeting in Vienna on June 22-23.

The narrative driving prices lower was that the group, led by major producers Saudi Arabia and Russia, would increase production by at least 1 million barrels per day. This figure is also believed to be the amount that the U.S. had asked Saudi Arabia to consider.

The huge sell-off on Friday and today’s subsequent follow-through move indicated that the increase in output was a done deal although there were still questions over the amount and the timing of the production hike.

However, since the early session sell-off, the market has recovered to trade higher for the day. Some traders are now saying that the production hikes are going to meet opposition from Iran, Iraq and Venezuela. While these three countries may not have the economic strength to convince Saudi Arabia and Russia to forego their plans to raise production, it does put increased pressure on OPEC to create a unified front.

While Saudi Arabia and Russia have been wielding the big stick during the production cut era which began in January 2017, they have managed to cover-up any disputes dealing with the agreement. Now that it looks like the deal to reduce output is beginning to crumble, cracks are starting to show signifying that perhaps the deal may not even last until the end of the year when it is expected to expire.

Additional factors triggering a volatile response today in the crude oil market is the possibility that China may further escalate its developing trade war with the United States by imposing import duties on U.S. products, including crude oil. This is also a potentially bearish development because an escalation of the trade war could hurt global economic growth that could have an impact on demand.

Furthermore, earlier today, Libya’s National Oil Corporation (NOC) said storage capacity at Ras Lanuf port had been cut by 400,000 barrels after a second crude oil tank was set on fire amid fighting between rival factions for control of two key export terminals.

The NOC warned that the blaze that broke out at storage take No. 2 early Sunday could spread to three further tanks, which would “stop exports from Ras Lanuf port completely”.

So although the focus was expected to be entirely on the OPEC meeting on June 22-23 and how much, and when the production hikes would begin, it appears that bearish investors could be in for a rocky ride this week with issues being raised over Chinese tariffs on U.S. crude and potential supply disruptions in Libya.