Can geopolitical tensions sustain oil price surges amid full storage?

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Geopolitical Tensions' Impact on Oil Prices Amid Storage Constraints

Geopolitical tensions can temporarily influence oil prices, but their sustained impact is limited when crude storage facilities are nearing capacity. While a recent surge saw West Texas Intermediate (WTI) for June delivery jump 19 per cent to US$13.78 a barrel, this price movement was primarily driven by US President Donald Trump's threat to engage Iranian boats in a critical shipping lane for crude. However, the underlying concern for market watchers remains the rising US crude inventories, particularly at the Cushing, Oklahoma hub, which is approaching its storage limits.
Recent Oil Price Rally and Influencing Factors

The oil market experienced a notable rally, with WTI futures for June delivery climbing significantly. This upward movement occurred in the wake of a specific incident where Iranian speedboats reportedly surrounded US Navy and Coast Guard vessels in the Gulf. In response, President Trump issued a directive to the US Navy to take action against any Iranian gunboats that harass American ships. Such geopolitical flare-ups in the Gulf, a vital route for international oil shipments, have historically led to temporary spikes in crude prices.
The Overriding Influence of Storage Capacity

Despite the temporary boost from geopolitical events, the fundamental constraint on sustained oil price increases lies in the global crude storage capacity. Analysts, such as Bart Melek of TD Securities, emphasize that prices must remain low to encourage the shutdown of production and prevent storage facilities from overflowing. The article notes that if storage facilities are full, geopolitical tensions will not have a lasting impact on oil prices. This highlights the critical role of available storage space in dictating the market's response to supply-demand imbalances and external shocks.
Broader Market Context and Demand Weakness

The petroleum industry is currently navigating a challenging environment characterized by significantly reduced demand due to coronavirus-induced shutdowns. This weakened demand, coupled with a past price war between Saudi Arabia and Russia, had already put downward pressure on oil prices. While a recent agreement among major producers to improve the supply-demand balance in the latter half of 2020 offers some potential relief, the immediate concern of overfilled storage facilities remains a dominant factor. The rally in oil prices also contributed to a broader uplift in European and US equities, although investor unease persists regarding the pace of economic recovery post-lockdowns.

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Can geopolitical tensions sustain oil price surges amid full storage?

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