Oil nears multi-week high on US-China trade optimism and Iran tensions

Oil prices were trading near multi-weak highs on Tuesday as hopes of a trade deal between the US and China buoyed sentiments. 

Discussions between the US and China regarding trade are ongoing, and negotiations are scheduled for Tuesday as well. 

It seems the US might relax certain technology export restrictions if China agrees to loosen its controls on rare earth mineral exports.

“This is providing some support to the market,” Warren Patterson, head of commodities strategy at ING Group, said. 

At the time of writing, the price of West Texas Intermediate crude oil on the New York Mercantile Exchange was at $65.40 a barrel, up 0.2%. Brent crude oil on the Intercontinental Exchange was up 0.3% at $67.21 per barrel.

Trade talks

In a significant diplomatic effort to de-escalate mounting tensions, high-ranking officials from the US and China convened in London for a crucial round of trade negotiations, extending discussions into a second day. 

These talks are aimed at addressing a complex web of issues that have increasingly strained the relationship between the two economic superpowers, moving far beyond the initial disputes over tariffs. 

A particularly concerning aspect of the ongoing conflict has been China’s move to restrict exports of rare earth minerals, essential components in numerous high-tech industries. 

These restrictions have raised alarms about the potential for widespread disruptions to global supply chains, which could in turn lead to a slowdown in international economic growth. 

US President Donald Trump stated on Monday that discussions with China are progressing positively, receiving favorable updates from his team in London.

Following improved US jobs data and easing concerns regarding trade between the two countries, commodity prices have rebounded. 

These recovering prices are also influenced by potential North American supply disruptions caused by Canadian wildfires, as noted by Goldman Sachs analysts.

Iran tensions

Iran announced its plans to soon present a counter-proposal for a nuclear agreement to the US, dismissing the existing American offer as “unacceptable”. 

Meanwhile, Trump reiterated that disagreements persist regarding Iran’s entitlement to enrich uranium within its borders.

With Iran ranking as the third-largest producer within the Organization of the Petroleum Exporting Countries, any potential relaxation of US sanctions would enable increased oil exports, consequently putting downward pressure on global crude prices.

“Nuclear talks between Iran and the US don’t appear to be progressing, providing some tailwinds for prices,” Patterson said. 

Iran is not willing to compromise on its right to enrich uranium, something the US won’t accept.

An OPEC oil output survey by Reuters indicated an increase in May, though contained. This was due to Iraq’s below-target production offsetting prior excess, and Saudi Arabia and the UAE’s less than permitted output rises.

OPEC+ is speeding up the reversal of its latest production cuts. This group, comprising OPEC members and allies like Russia, collectively supplies roughly 50% of the global oil output.

Eight members of OPEC+, including Saudi Arabia and Russia have agreed to increase oil output by over 400,000 barrels per day for each of May, June and July so far. 

China imports and gasoil

China’s crude oil imports in May were comparatively low, as indicated by recent trade figures. 

Imports reached approximately 11 million barrels per day, reflecting decreases of 5.7% from April and 0.8% from May of the previous year.

Despite refinery maintenance typically peaking in May and contributing to decreased imports, yearly imports have still increased by 0.3% compared to the previous year.

Meanwhile tightness in the gasoil spot market is still being signaled by the ICE market.

A sharp increase in backwardation has propelled the ICE gasoil spread to nearly $16 per ton from roughly $8 a ton the prior week, according to ING Group.

Moreover, the ICE gasoil crack remains strong. Notably, speculators increased their market purchases during the previous reporting week, coinciding with open interest in ICE gasoil reaching unprecedented levels, Patterson said.

Long open interest from swap dealers remains near record highs, suggesting a potential increase in consumer hedging.

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