Unless you’ve been too busy looking at the funniest tweets about the Royal Wedding, then you’ve probably heard that oil is bringing sexy back to the markets these days.
For newbies out there, you should know that oil prices are also important for forex traders because it affects domestic spending patterns, the economy’s trade activity, central bank policies, and eventually the exchange rates.
So, what’s exactly driving crude oil prices higher lately? More importantly, can these catalysts extend the Black Crack’s uptrend? First, let’s take a look at these drivers:
U.S.’ conflict with Syria
While oil prices have started climbing since mid-February, it wasn’t until the U.S. condemned the Syrian government for a poison gas attack (and eventually attacked Syria for it) that the bullish momentum really took hold.
Since Syria is the only major oil-producing country in the Eastern Mediterranean region and the U.S. was also provoking major oil producer Russia in the brouhaha, the possibility of oil production disruptions were enough to attract some bulls.
U.S.’ conflict with Iran
Just when oil prices were pulling back in early May, President Trump has decided to pull the U.S. out of a 2015 nuclear deal it made with Iran and a bunch of other countries. According to Trump, the deal should have never been made in the first place, and that it doesn’t stop Iran from making a nuclear bomb.
Aside from reinstating economic sanctions on Iran, the U.S. will also slap penalties and put pressure on its allies and any companies who do business with Iranian oil companies.
Remember that Iran was the fifth largest oil producer in the world with just under 4 million barrels per day (mb/d) before Trump exited the deal. And if the 2012 sanctions were anything to go by, then we can expect Iran’s exports to fall by at least 1.2 mb/d.
U.S.’ conflict with Venezuela
Venezuela was once one of the major oil players, but the economy’s monster debt load, hyperinflation, ageing equipment, and workforce unrest have limited its production capacity. Add to that OPEC’s imposed quotas and the oil giant’s production had fallen from 2.3 mb/d in January 2016 to just 1.5 mb/d in April.But earlier this week traders woke up to news that Venezuelan President Nicolas Maduro got himself elected (again) in an election which U.S. officials and other critics have labelled a “sham.”
In reaction to the news and what the U.S. says includes “endemic economic mismanagement and public corruption at the expense of the Venezuelan people,” Trump has signed an Executive Order that effectively restricts the Venezuelan government to liquidate its assets and get its hands on U.S. dollars.
Specifically, U.S. citizens and anyone in the U.S. are prohibited from purchasing any type of debt from the government including its state oil company, PDVSA.
Tightening oil markets?
Back in mid-April OPEC Secretary-General Mohammad Barkindo reported that the organization has achieved “150% conformity level” in adhering to its supply cut pact.
He claimed that the supply glut has shrunk by nine-tenths since the start of 2017, bringing the stocks in storage from above 400 mb/d to just about 43 mb/d above its five-year average.
Meanwhile, China’s crude oil imports hit its second-highest level in history in March.
So, do these mean that oil prices will continue to climb higher?
For starters, the U.S.’ unilateral exit from the Iran nuclear deal isn’t expected to have much bite, as the rest of the parties seem willing to keep calm and carry on with the deal.
Not only that, but oil giants such as Saudi Arabia have also offered to fill in gaps left by decreases in Iran’s (and even Venezuala’s) exports.
And then there’s your good ol’ supply and demand. In its latest monthly report the IEA downgraded its global demand expectations from 1.5 mb/d to 1.4 mb/d due to rising oil prices.
It also shared that non-OPEC supplies will increase from 1.8 mb/d to 1.87 mb/d this year as shale oil producers respond to higher prices. So much for tightening!
If these aren’t enough to make you think twice, you should know that hedge fund managers themselves are getting off the long crude oil train.
A reent CFTC report showed that hedge fund managers have reduced their net long position in Brent and WTI has been reduced by a total of 124 million barrels over the last four weeks. Specifically, net long positions in Brent have fallen by 84 million barrels over five consecutive weeks, while net length in NYMEX and ICE WTI has dropped by 53 million over four weeks.
For now, it looks like the bulls are still happy enough to push the Black Crack higher across the board as the factors pushing it higher remain valid.
But keep in mind that even if crude oil extends its uptrend, other market factors, such as reactions from consumers and central bankers would soon factor in to rebalance the trend. Make sure you’re around to see the possible trade opportunities in case we do see retracements or reversals for the commodity!