The Trade War Explained: Part II South African Fuel Security

Over a year later, the US-China Trade War has only grown in severity and in its wake, the world is trying to keep its head above water. Significantly impacted is the oil industry, with questions rising about the security of South African fuel…

SA Oil discusses the impact of the Trade Was on the oil industry

The Trade War Rages On

When US President Donald Trump first proposed investigations into applying tariffs on around $60 billion worth of imported Chinese goods on 22 March 2018, no one expected how quickly what has become known as the US-China Trade War would develop. More than a year later, the entire world has suffered the consequences of the now implemented tariffs, which have more than doubled, with China’s own imposed tariffs adding to the economically impactful game of chess the two superpowers have been playing ever since. The latest developments in the Trade War have shown both sides standing steadfast, with neither willing to buckle under the pressure imposed by their opponent, or that of the rest of the world – evident of this is not only calls made for the end of the Trade War, but also from a drastic change being felt globally, in many industries.

Impact of the Trade War on Oil

A key global industry that has felt the repercussions of the Trade War is the oil industry. Varieties of the commodity had been trading at nearly $80 a barrel at the start of 2018, though increasing tensions between the US and China saw prices start to fall from July that year. Additional factors are at play here, including:

  • The prolonged dispute between the two countries has caused an economic stagnation felt globally, reducing the demand for oil, which has brought prices down
  • The Organisation of the Petroleum Exporting Countries and its allies (countries like Russia who form the OPEC+) extended the agreement, which began in 2018, to cut oil production in an effort to boost the market, though US sanctions on major oil producers Iran and Saudi Arabia have cut more than the OPEC deal – Iran’s crude exports alone have dropped by approximately 300,000 bpd (barrels per day) since the sanctions were implemented
  • The US has also placed sanctions on another major oil producer, Venezuela, amidst the uncertain political situation under President Nicolas Maduro – this has added to the crude oil supply issue, effecting the price of the commodity worldwide.

In an attempt to combat the increasing loss of supply of one of the world’s most important resources, the US has increased its own oil production, with their stockpiles soaring to over 37 million barrels. As one of the world’s biggest consumers of the commodity, this helps the US in the Trade War plight, but could prove to be another blow for the oil market as experts estimate that this oversupply may form another glut, threatening another bear market. Investors have since dumped shares in oil drillers and major oil companies like ExxonMobil and Chevron have felt the pinch.

More Trouble in the Strait of Hormuz

Considered to be the world’s most important oil artery, around a sixth of the world’s oil passes through the Strait of Hormuz, averaging on 17.2m bpd. Stretching 39km, the strait also sees one-third of the planet’s liquified natural gas (LNG) pass through to open ocean, making the location a key point for the industry. However, recent events have had experts questioning its security.

The strait has a history of international disputes: oil shipments using the channel were plagued during the Iran-Iraq War of the 1980s, and the location also served as a watery grave for the 290 people who died after the US warship Vincennes shot down an Iranian passenger plane in 1988; more recently, in 2012, Iran threatened ships using the sea passage after US and European sanctions targeted the nation’s oil sales.

US-Iran Tensions Impact the Oil Industry

The strait continues to be beleaguered thanks to recent US sanctions on Iranian oil production when, in July 2018, Iranian President Hassan Rouhani disrupted oil tankers passing through. In May and June 2019, attacks were made on a total of six oil tankers travelling through the strait, raising fears once again over the safety of those using the channel, as well as on the supply of oil to the rest of the world. Historically, the United States Fifth Fleet has been responsible for protecting the shipping lanes, though US President Donald Trump has questioned the US’s involvement in such a task given its strained relations with Iran, as well as his concern over the lack of compensation for doing so. This relationship has been made worse after Iran shot down a US surveillance drone, which it claims was flying over Iranian airspace, despite the US refuting these claims. In addition to US ‘concerns’ regarding the strait, Trump has also pointed out that Trade War opposition China obtains most of its oil from the Strait, emphasising the fact that he wants to withdraw US involvement in the area.

What It Means for South Africa’s Oil Industry

Growing trade war concerns and the implications of the US’s oversupply of oil has, in the short-term, provided South Africa with a win in the oil industry. The drop in oil prices, according to the Central Energy Fund (CEF), has had a net positive effect – especially for local petrol prices, which will see a decrease in July 2019 of 91c for petrol and 70c for diesel.

South Africa’s major concern is supply. Apart from the global economic decline derived from the US-China Trade War, the biggest threat for the country’s oil supply has come from US sanctions placed on Saudi Arabia, given that the majority of South Africa’s oil is imported from the oil producer – around 39%, followed by Nigeria at about 29% and Angola at 16%. In addition to this, concerns have arisen over debt-laden parastatal Eskom, whose coal deals have fallen through the cracks, resulting in it burning millions of Rands worth of diesel to stay afloat – just. The silver lining on the dark cloud settling over South Africa’s oil industry is found in the recent oil discovery off the coast earlier this year – equating almost 500 million barrels of oil equivalent. The find, a well of gas condensate (a liquid form of natural gas, worth more than its crude oil counterpart, has the South African government hard at work on a policy – the Petroleum Resources Development Bill. Key role players hope the Bill will protect the sector from the uncertainty that’s gripped the industry since the start of the Trade War, and due to the sanctions placed on oil exporters by the US.

Reliable Fuel Suppliers

In times of uncertainty, especially when it impacts a crucial industry like crude oil, using a dependable fuel supplier is key to avoiding production down times. SA Oil is a long-standing industry expert, and we have ensured the security of our fuel supply has not been implicated despite the current global climate. Get in touch with us for reliable, tailored business solutions.