Oil has started the second quarter at a crossroads after trading in a narrow range so far in 2018 with the industry split over whether crude can sustain any rise of more than $70 a barrel. Prices dropped by as much as 4 per cent in holiday-thinned trading on the first day of the new quarter on Monday, pulling international benchmark Brent crude back to less than $68 a barrel. But the market stabilised on Tuesday as traders in Europe returned from a long Easter weekend with many betting that rising geopolitical risks could overshadow fears of robust output from US shale fields.
Those competing factors have left the market finely balanced. “Prices are being kept in check,” said Olivier Jakob at consultancy Petromatrix. “These relatively high levels are favourable for bringing on output from non-Opec producers but geopolitical factors are also dictating the market.” The bullish factors hanging over the oil market include fears of renewed sanctions on Iran’s oil exports should the US decide to withdraw from a nuclear deal with western powers. There is also uncertainty about the output of Opec peer Venezuela as a result of internal unrest and poor management of its oil sector. While hedge funds are banking on near record numbers for further price gains in oil, some industry participants are urging caution.
The escalation of tension between China and the US over tariffs has stoked fears of a trade war that could hit the global economy and oil demand. The drop in oil on Monday coincided with heavy selling in global markets but it also indicated the willingness of traders to take profits, highlighting a degree of nervousness in the market. Brent has traded within a $10 range this year, hitting a high of about $71 a barrel. While it is testing new levels, it has failed to hold at those heights or break far above them.