Moody’s and China Dent the Détente Delight
Despite a bump to proceedings caused by what appeared to be a breakthrough in the nuclear farrago playing out between Iran and the United States, touched on below, oil prices enjoyed an ultimately spirited last week and made decent gains. The ninety-day reciprocal cut in tariff setting between the two most important protagonists, thrashed out in Geneva by representatives from Washington and Beijing, eventually won out in sentiment allowing the main futures contracts to finish +2.5% in the crudes and +3.5% in products. Equities have now chased away nearly all the blues caused by ‘Liberation Day’, and a general sense of ease was felt in markets as President Trump set about his charm offensive in the Middle East with all suites feeling the benefit of his securing investment into the United States in some countries while striking sanctions from Syria as it emerges from the Assad dictatorship and terror.
Therefore, there is a little dumbfoundedness from markets on how to react to a downgrading of the US rating over the weekend. It should come as little surprise that Moody’s in line with Fitch and Standard & Poor’s in now classing its credit rating at AA1 rather than the gold star AAA, but the timing is damaging. Faced with a national debt of $36 trillion and an ever-widening budget deficit, it can only fall to the inconsistency of economic signals from the current Administration which has prompted the normally stoic Moody’s to act. The rating has not been changed negatively since 1917, which means US Treasury Secretary, Scott Bessent’s attempt to fluff the downgrade as a “lagging indicator” is nonsensical. However, the change may see limited impact and its effect might be a creep of monetary disease rather than a tree-felling crash, but its fallout will be keenly watched.
Adding to the general mood of indecisiveness as the week opens are data from China. While Industrial Output beat the growth expectation of 5.5% to register 6.1% year-on-year, Fixed-asset investment missed but the most important indicator, Retail Sales, only rose 5.1% against a predicted 5.5%. The National Bureau of Statistics data was accompanied by a warning that alludes to the tariff strife as “there are still many unstable and uncertain factors in the external environment,” with further comments on the need for consolidation to achieve sustained recovery.
Iran is a problem of politics, not of molecules
In another twist of plot on Friday, the Iranian Foreign Minister, Abbas Araghchi appeared to pour scorn on an impending nuclear deal with the United States. Confirming that which most of the world suspects, and captured at a public event by Bloomberg, he pointedly revealed, “what the parties to the negotiations say in the media is not the same as what they say behind closed doors.” Elaborating and likely confirming what most of us rightly cynically think and ask, he went on, “We see many opposing and contradictory positions from the United States. Is this due to a lack of focus in Washington or is it simply a style of negotiation?” Well said indeed sir, however, may we refer you back to the source of the breakthrough being an Iranian one? The world would charge that successive Iranian officials are not unskilled in cloak and dagger duplicity and that it ‘takes one to know one’. Mr Araghchi continued in diplomatic double speak, “We are building trust and transparency on the nuclear issue, but we won’t abandon enrichment.” Uranium enrichment has always been the major sticking point for the United States, therefore, Iran can be as open as it likes, if it does not give up such high-level nuclear processing the prospect of a full deal must all but disappear.
So then must the idea of Iranian crude oil flowing freely into the world’s manifold of oil users unhindered by the scrutiny of US sanctions. However, we would argue that a world deprived of Iranian crude will have a limited effect on prices, there is more than enough supply available elsewhere, notwithstanding the impending full return of OPEC+ cuts. The market obviously thinks so. On Thursday, when the surprising possible nuclear deal news broke, prices that had been about trying to construct an uptrend were unceremoniously turned turtle. An absence of Iranian crude is an additive to a greater bullish effect, such as détente between China and the US in tariffs, it is not a market turner on its own. Yes, it can also be added to how Russia’s exports will remain in doubt while Vladimir Putin plays games with peace talks and the similar sanction issues with Venezuela stopping the South American’s exports, but to continue in emphasis, a global oil balance without Iran’s crude is no game changer. Estimates vary, but exports from the Islamic Republic are below 1.5mbpd, down from 1.8mbpd under the softened gaze of Joe Biden, and will continue to fall.
Questions can be asked as to who will continue to lift those exports? China’s refiners of the Shandong region are the best customer and at past times $80-$90/barrel value in global markets, would be readily willing to enjoy discounted crude from anywhere and possibly risk the ire of the US. But at such current low global prices, sourcing alternative crude is not an issue. Additionally, China’s oil appetite is not what it was. EV penetration into motor fuels and a faltering economy is dragging down utilization rates which has a negative influence on feedstock demand. Iran’s current oil production stands at between 3-3.3mbpd. If by some diplomatic luck and allowing for a leap in time to achieve that fortunate outcome, an unhindered oil industry could easily push output close to its maximum of some 4mbpd. Exports then would increase commensurately and by some reckoning achieve 2mbpd. Such size of exports would find itself cast into a very competitive world. The US/Iran nuclear negotiations are not clear cut and may take many months to finally reach accord. But given the state of crude prices and a future looking to be beset with a grind, prospective additional barrels should be more influential than increased paucity.
Overnight Pricing
19 May 2025