Persian Puzzle for Oil Prices

On the one hand, the White House has to be pleased about the oil market’s mild reaction to a series of incidents this week involving Iran. On a deeper level, though, it should be concerned.

U.S. benchmark crude prices started out the week above $60 a barrel. By Friday morning, they were barely above $55. That seems out of tune with headlines from the Middle East that should have set energy markets on edge.

Early this week, Iran’s Supreme Leader Ayatollah Ali Khamenei charged Britain with “piracy” for seizing an Iranian tanker near Gibraltar allegedly violating sanctions by bringing crude to Syria.

Iran also dismissed a claim by U.S. Secretary of State Mike Pompeo that it was ready to negotiate over its missile program—a statement that had soothed the oil market. And on Thursday, it was reported both that Iran had seized a foreign oil tanker near its waters and that a U.S. Navy vessel had shot down an Iranian drone. Tehran denies that the U.S. downed its drone.

The crude market’s reaction—continued steady price declines—illustrates the market’s focus on tepid demand and robust supply from other regions. The International Energy Agency is revising its demand-growth forecasts as trade tensions and slower Chinese economic growth take a toll. IEA Executive Director Fatih Birol said the agency will lower its demand-growth forecast for 2019 to 1.1 million barrels a day from the 1.2 million barrel forecast it made only last month and its original 1.5 million barrel forecast.

Meanwhile, U.S. production isn’t missing a beat. The U.S. Energy Information Administration reiterated in its most recent short-term outlook that the U.S. will become a net exporter of crude some time in the fourth quarter of this year. Average daily production is seen rising to 12.4 million barrels in 2019 from last year’s record 11 million barrels a day. In other words, U.S. supply growth alone will exceed global demand growth.

The late June agreement between the Organization of the Petroleum Exporting Countries and its allies to extend their output restrictions through next spring had given a brief fillip to prices. But an IEA report last week cast doubt on the ability of OPEC+ to counteract fundamentals without further cuts.

“Clearly, market tightness is not an issue for the time being and any rebalancing seems to have moved further into the future,” it said, calculating that global stockpiles could increase by 136 million barrels by the time the agreement expires next March.

An actual physical disruption to supplies through military action in waters surrounding Iran would send prices surging, but minor actions are producing only hourslong blips.

That gives the White House scope for continued tough talk on Iran without fear of putting upward pressure on domestic pump prices. In the longer-run, though, it raises the question of what is happening to the global economy. The administration’s tough talk on trade is likely playing a role in dampening demand.

The threat of a trade war is outweighing fear of a shooting war.

Write to Spencer Jakab at spencer.jakab@wsj.com

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