Crude Oil Futures: Iran versus the West

Today at 7:51 AM ET, US or WTI crude oil futures fell 0.9%. There are renewed concerns about a global slowdown due to trade war uncertainty. The concerns might have impacted US crude oil prices. In the trailing week, US crude oil futures lost around 6.8%. The United States Oil Fund LP (USO) fell 4.8% during this period. USO invests in US crude oil futures. US crude oil prices didn’t sustain their highs after the drone attacks. Saudi Arabia’s production revival dragged oil prices. However, geopolitical tensions in the Middle East have been escalating.

Crude Oil Futures: Iran versus the West

Iran versus the West

On Tuesday, Britain, France, and German held Iran responsible for the attacks on Saudi Arabia’s oil infrastructure. The US already blamed Iran for the attacks. However, Iran rejected the accusations and warned the western countries about a possible conflict. Earlier this week, Iran warned the US about deploying additional forces in the Middle East.

Until now, Saudi Arabia hadn’t responded to Houthis’ peace initiative last week. The ongoing conflict in the Middle East probably won’t end soon. The US government is carefully examining different options to limit any upside in crude oil futures. The US imposed more sanctions on the Iranian Central Bank after the attacks. US forces in the Gulf want to defend rather than attack.

US crude oil futures

A Reuters poll estimated a decline of 0.768 MMbbls (million barrels) in oil inventories for the week ending September 20. On Wednesday, the EIA will announce crude oil inventories. If the government data show the same draw, then the negative inventories spread will contract by one percentage point. A contraction could be a bearish development for US crude oil prices. In the past, oil prices and the inventories spread had an inverse relationship. The inventories spread represents the gap between oil inventories and their five-year average.

On September 18, the EIA reported inventory data for the week ending September 13. In the report, the inventories spread remained constant on a week-over-week basis. On September 18–23, oil prices rose 0.9%. Optimism around the trade talks supported oil prices. 

Chesapeake Energy (CHK) fell 4.4%. The company has a higher affinity for oil prices. The API (American Petroleum Institute) might report a draw of 1 MMbbls in crude oil inventories, based on a Reuters poll. The API inventory data will be announced later today.

Forward curve

On Monday, WTI crude oil November 2019 futures settled $4.9 above the November 2020 futures. On September 16, the premium was at $8.1. During this period, US crude oil futures have fallen by more than six percentage points. The contraction in the premium indicates a fall in the bullish sentiments for oil prices. Usually, the premium and oil prices move in the same direction.

On Monday, US crude oil futures for the next year settled in descending order. The attacks on Saudi Arabia’s oil facilities increased fears about oil’s scarcity. The sentiments pushed front-month futures higher. The downward sloping forward curve is a positive development for USO. The fund will benefit when it rolls over to next month’s futures contract. As a result, USO outperformed crude oil prices by two percentage points in the trailing week.