Iran Shot US Drone: Is Oil’s Upside Unstoppable?


Jun. 20 2019, Updated 8:58 a.m. ET

Iran shot US drone

As of 7:14 AM ET on June 20, US crude oil August futures have risen 3.4% from the last closing level due to rising geopolitical tension in the Middle East. Iran shot down a US military drone in the international airspace. The incident will likely pull the diplomatic relationship between the US and Iran to a new low. This week, the US plans to increase its military presence in the Middle East by another 1,000 personnel following the tanker attack.

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Is oil’s rise unstoppable?

On June 18, US crude oil active futures rose 3.7%, while the implied volatility fell 8.5%. If the implied volatility decreases more, it might signal a strong upside in oil prices. Usually, the implied volatility moves inversely to oil prices.

On June 20, the EIA reported a fall of 3.1 MMbbls (million barrels) in US crude oil inventories. A Reuters poll estimated a decline of 1.077 MMbbls. Gasoline inventories fell by 1.7 MMbbls, while a Reuters poll suggested a rise of 1.1 MMbbls. The fall in oil and gasoline inventories will likely support US crude oil prices.

Energy stocks

On June 20, the rise in oil prices could push energy stocks to open higher. Energy stocks account for ~5.2% of the S&P 500 Index (SPY). If energy stocks open higher, it would benefit the S&P 500 Index. On June 20, investors should watch oil-weighted stocks like California Resources (CRC) and Hess (HES). They had the highest correlation with US crude oil in the last three months.

The rise in oil prices will likely benefit natural gas–weighted stocks like Chesapeake Energy (CHK). By the end of 2019, Chesapeake Energy’s production mix in oil could rise to 26% from 19% in the fourth quarter of 2018.


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