Geopolitical moves by the US have dominated oil prices, with sanctions on oil producers driving them up further. But Opec is signalling it could increase output, and the danger of a global trade war has just bubbled up again as a threat to demand.

UK retail prices in late May were at their highest since October 2014, reflecting underlying crude prices above $79/bl in the week to May 23. The market is very different from just a few months ago, now that Opec and its partners have reached their goal of bringing OECD stocks back to the five-year average and crude prices are at a 42-month high. This much tighter market is easily spooked by threats to supply. When the US announced it would reimpose sanctions on Iran in November, Ice Brent futures rose by $2.36/bl on the day. And the imposition of US financial sanctions against Venezuela’s government helped push crude prices to 20 cents shy of $80/bl on May 22.

But another international political initiative by Washington then dampened prices again at the end of the month when the imposition of tariffs on EU, Canadian and Mexican steel goods raised the oil market’s worries of a wide trade war. A drop in trade would weaken economic and oil consumption growth, especially for diesel.

This has coincided with signals by Opec/non-Opec producers that they may increase output. These producers are alert to the possibility of prices around $80/bl weighing on demand. Demand growth has been such that the US and Canada the main sources of new supply replacing lost output from Opec and its partners are now hitting physical export constraints. Pipeline capacity is strained, trapping crude inland and forcing operators to resort to expensive transport to port. Opec and Russia are keen to capitalise on this bottleneck and grab back some market share. In the meantime, strong economic growth keeps driving diesel demand. The fuel’s refining margin widened to over $14/bl for May, its highest for that month since 2015. UK drivers should feel some reprieve when the late-May drop in underlying crude prices filters through, but they, along with the rest of the market, will remain at the mercy of US and Opec politics.

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