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Iran had been a supportive factor
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A change in the Trump administration signals a policy pivot
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Bullish and bearish factors change places- Until the attack on Saudi Aramco on Saturday
Sometimes the most bullish and bearish factors in a market change places, and that is what we started to see last week. The price of WTI crude oil that trades on the NYMEX division of the CME has traded in a range between $50 and $60 since late May. Meanwhile, Brent crude oil futures that trade on the Intercontinental Exchange has traded in a band between $55 and $65 per barrel. The prices of the active month futures contracts closed last Friday in the middle of their trading ranges with NYMEX October futures at $54.85 and Brent November futures at just over the $60 per barrel levels.
The ongoing tensions between the US and Iran have provided support for the price of the energy commodity. At the same time, the ongoing trade war between the US and China has weighed on the oil price. Iran has created concerns on the supply side of the fundamental equation while China has raised fears over falling demand.
Last week, signs that the fundamental factors that are pulling the price of crude oil in opposite directions threatened to change places. We were looking at a situation where Iran was becoming bearish for crude oil and China bullish. The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) are ETF products that replicate the price action in the two benchmark crude oil futures markets.
Iran had been a supportive factor
When the US walked away from the 2015 Iran nuclear nonproliferation agreement and slapped sanctions on the Iranians tensions in the Middle East rose. Iran’s President warned that if the nation could not sell its oil to customers around the world, it would stop other oil-producing countries in the Middle East from shipping petroleum. At first, the US issued six-month exemptions to eight countries that purchase Iranian oil but refused to renew them in early 2019.
The military buildup around the Straits of Hormuz and several provocative incidents caused concerns over oil supplies to increase. The standoff between the US and Iran had been a supportive factor for the price of the energy commodity.
A change in the Trump administration signals a policy pivot
John Bolton was a hardliner in the Trump Administration when it comes to Iran. The National Security Director left the administration last week over policy disagreements with the President. While Mr. Bolton insists he quit, and the President said he was fired, his departure may have calmed the waters when it comes to the future relations between the US and the theocracy in Teheran.
The change of personnel in the Trump administration could clear the way for discussions between the US and Iran. President Trump has said he wants to renegotiate the agreement he walked away from in 2018. With sanctions choking Iran’s economy, the potential for a compromise by both nations has the potential to calm the tense waters in the Middle East. The price of crude oil dropped after John Bolton’s departure last week as the supportive factor for the energy commodity could shift to one that weighs on the price of oil over the coming weeks and months.
Bullish and bearish factors change places- Until the attack on Saudi Aramco on Saturday
Meanwhile, the escalating trade war between the US and China had weighed on the price of crude oil since early August. When President Trump slapped new tariffs on China and the Chinese retaliated at the beginning of August, the price of crude oil fell.
(Source: CQG)
The weekly chart shows that the price of NYMEX crude oil decline to a low at $50.52 per barrel during the week of August 5. Brent crude oil moved to the low end of its trading range at the $55 level in early August. The trade dispute has weighed on China’s economy and threatened to thrust the world into a recession.
Last week, optimism over trade returned to the markets. China and the US are back at the negotiating table with both sides working towards an agreement. The return of a more positive outlook for trade means that economic weakness in China could decline. Since crude oil is the energy commodity that powers the world, better prospects for the Chinese economy is a bullish factor for the energy commodity.
Last week, Iran and trade were threatening to switch positions as the former appeared ready to foster lower oil prices and an improving outlook for the Chinese economy is supportive of the price of the energy commodity. The path of least resistance for the price of crude oil is a complex puzzle where geopolitics often plays a significant role.
On Saturday, September 14, a coordinated drone attack on Saudi oil production crippled an Aramco facility and cut production in half. The attack means that about 5% of world supply was interrupted. Many signs point to Iran’s fingerprints on the event that will add volatility to the oil market over this week.
The United States Oil Fund LP (USO) was trading at $12.56 per share on Monday morning, up $1.12 (+9.79%). Year-to-date, USO has gained 4.58%, versus a 12.89% rise in the benchmark S&P 500 index during the same period.
USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 109 ETFs in the Commodity ETFs category.
About the Author: Andrew Hecht
Andrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.