Two oil tankers were attacked in the Gulf of Oman last week. Global oil markets reacted with relative calm which saw oil prices dip for the day and then bounce back.

 

Historically, geopolitical tensions impacted oil prices. What remains confusing is how this current geopolitical tension failed to cause oil prices to skyrocket.

 

Since the US declared, in April, that it will not renew sanction exemptions for countries purchasing oil from Iran, crude oil prices stumbled. West Texas Intermediate (WTI) crude oil futures went from their peak at $66.60 per barrel on April 23 to $50.6 per barrel on June 5, taking a nearly 25 percent plunge.

 

After extended oil production cuts in OPEC and Russia, the global crude oil market has achieved a relative balance.

 

One possible reason that regional tensions did not cause oil prices to surge could be the pessimistic outlook on the economy in conjunction with the uncertainties caused by the China-US trade friction.

 

Low oil prices combined with geopolitical conflicts benefit the White House more than anyone else. Americans are particularly sensitive about oil prices because they rely on vehicles that burn oil as a primary means of transportation.

 

The wealth of the American people is either directly or indirectly related to the stock market. Whether the US president can get re-elected is strongly connected to the performance of oil prices and the stock market. As long as there is cheap oil and a bull market, the voting public will tolerate the faults of any politician.

 

Moreover, interest rates have the biggest impact on the US economy, and the stock market is only a short term influencer. If the US Federal Reserve stopped raising interest rates or even reducing them, it could shore up the stock market. The Fed's monetary policy is independent, and it adjusts the interest rate in accordance with the expectation on the inflation rate.

 

Since oil prices hold significant weight with inflation rate calculations, lower oil prices would mitigate inflationary pressure brought on by a trade conflict which would then prevent the Fed from implementing an interest rate hike and may even prompt the Fed to cut rates.

 

So far, Washington has been suppressing its competitors by provoking trade conflicts. One of the biggest negative consequences are the uncertainties looming over global economy.

 

Even with the US tariffs on Chinese products, the consequences have been limited in relation to the significant consumption volumes of both countries.

 

The serious consequence is the uncertainty caused by trade friction that is also damaging the global value chain. The pessimistic sentiments caused by these uncertainties are the reasons why oil prices run against normal trends.

 

The US dollar, as a reserve currency in the international financial system, is often used to hedge against risk. If geopolitical conflicts intensify, capital in search of a safe haven will rush to the US. Such large amounts of capital do not guarantee high returns. Safety is their main priority. The capital inflow has added liquidity to the US equity market.

 

Meanwhile, the financial system has maintained a complicated balance. The expectation that the Fed may reduce interest rates has placed pressure on the US dollar index. There are risks involved when money flows out of the US.

 

After the oil tankers were attacked, the US dollar index showed a significant increase. Market expectation has turned around within a short period of time. The constant inflow of hedge funds is essential to sustaining a flourishing US economy and stock market.

 

In hindsight, the Gulf of Oman attack was suspicious. However, one thing remains clear, the biggest winner from low oil prices and worsening geopolitical situation is, without any doubt, the US.

 

The author is dean of the China Institute for Studies in Energy Policy at Xiamen University.

 

By Lin Boqiang Source:Global Times