Oil starts the week lower on US trade wars, emerging market worries

London — Oil prices slipped on Monday as trade tensions and troubled emerging markets dented the outlook for fuel demand, though US sanctions against Iran pointed towards tighter supply ahead.

Benchmark Brent crude oil was down 10c at $72.74 a barrel by 8.50am GMT. US light crude was 15c lower at $67.48 a barrel.

Turkey’s financial crisis has raised the risk of contagion throughout emerging economies, dragging down the rand, Argentina and Mexico’s pesos as well as the Russian rouble. It has also dented emerging market stocks while curbing growth and the outlook for oil demand.

This is compounding worries that a deepening trade war between the US, China and the EU will squeeze business activity in the world’s biggest economies.

“Trade protectionism and escalating tensions between the world’s largest economies (the US and China) have cast a looming shadow on global oil demand growth in 2018,” brokerage Phillip Futures said on Monday.

Hedge funds and other money managers reduced their bullish positions in US crude futures and options in the week ending August 7, data from the US Commodity Futures Trading Commission showed on Friday.

Phillip Futures said that hedge funds had cut bullish bets on oil because of “rising production levels from Opec and the US”.

US energy companies last week increased their number of active oil rigs by the most since May, adding 10 rigs to bring the total count to 869, according to the Baker Hughes energy services firm.

That was the highest level of drilling activity since March 2015.

Despite the cautious mood in oil markets, bullish sentiment found some support from expectations that US sanctions against Iran would restrict Iranian crude exports, tightening global supply.

The US has started implementing new sanctions against Iran, which from November will also target the country’s petroleum sector.

Iran is the third-largest producer in Opec, behind Saudi Arabia and Iraq, pumping 3.65-million barrels a day in July, Reuters’ monthly survey showed.

“There are lots of variables in the oil market, the most important of which is Iran,” said Tamas Varga, analyst at London brokerage PVM Oil Associates.

“If one-million barrels a day or more of Iranian exports go AWOL, the current fragile supply-demand balance will be upended, potentially sending oil prices above the May peak.” ANZ bank sounded a similar warning to bears.

“With US sanctions on Iran back in place … maintaining global supply might be very challenging,” ANZ analysts wrote in a note to clients.

Reuters