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Thequestionis whyoiltradersseemtobewhistlingpast
the possibility that today’s scuffles could turn into an ’80s-style
tanker war. “It is amazing” that “a tanker has been seized, and
we’ve barely moved” the price of oil, says Richard Fullarton,
founder of the oil-focused fund Matilda Capital Management
in London, who’s traded energy derivatives for more than
20 years. Salih Yilmaz, a London-based energy analyst for
Bloomberg Intelligence, says the risk of worsening conflict “is
definitely there, and it may be underplayed by the market.”
Traders and other observers can cite a string of reasons
the Gulf strife doesn’t justify a rise in price. A smaller share
of the world’s oil passes through the Strait of Hormuz now
than in the ’80s, Caitlin Talmadge, a professor at Georgetown
University’s Walsh School of Foreign Service, wrote in an
email. In addition, she said, “Markets believe the U.S. will
intervene militarily if needed to secure supply.” If tensions do
push up oil prices a lot, she wrote, that incentivizes the peo-
ple involved in shipping the region’s oil to send more ships
“so they can fetch a higher price for their cargo,” and that
supply pushes the price down.
What happened in the ’80s is instructive. The attacks by
warring Iraq and Iran initially led to a 25% drop in commer-
cial shipping and a rise in the price of crude, but fears faded
as it became clear that only about 2% of ships’ passages
were disrupted, according to the Robert Strauss Center for
International Security and Law at the University of Texas atAustin.Despitethetankerwar,oilpricesfellsharplyin 1986
because of a supply glut.
As in the early ’80s, the price of crude surged this spring
over Mideast tensions. But this summer, fundamentals of sup-
ply and demand are having a bigger impact on the market than
headlines out of Washington, Tehran, and the Gulf. Growth in
global demand was the slowest since 2011 in the first quarter
and has continued to be soft, so there’s little risk of a shortage
even if there were a temporary interruption in Gulf supplies.
The story that’s influencing the oil market these days is one
of surplus, not shortage. Crude prices would be even lower if
not for the Gulf conflict, says Caroline Bain, chief commodi-
ties economist at Capital Economics. “What it has done,” she
says, “is put a floor under the prices.”
Bearish forecasts have weighed heavily on oil prices. On
June 14 the Paris-based International Energy Agency predicted
that global oil supplies will increase far more than demand in
2020, with the continuing boom in U.S. shale augmented by
new fields in Brazil, Canada, and Norway. The Organization
of Petroleum Exporting Countries agreed in July to continue
output curbs into the first quarter of 2020, but that may not be
enough to prevent a glut: OPEC estimated on July 11 that the
amount of crude required from the cartel will slump sharply
next year as non-OPEC supply surges.
Not only is stronger supply suppressing oil prices, but
weaker-than-expected demand is, too. For a dramatic9 REMARKS BloombergBusinessweek July 29, 2019lllii ee
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