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Any Spike in Oil Prices Might Not Be Sustainable

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On Wednesday, WTI crude oil prices fell approximately 4.9% and settled at $59.61 per barrel. The fall was the largest one-day decline since November 29. In November, the market’s nervousness about the OPEC+ meeting dragged active US crude futures. On Wednesday, the United States Oil Fund LP (NYSEARCA:USO) fell 3.6%.

When securities fall more than 20% from the high, then the bear market starts. Yesterday, US crude oil futures touched an intraday high of $65.65 per barrel—the highest level since April. At 5:17 AM ET today, active crude oil futures have already fallen 9.2% from their ten-month high. Another 11.9% decline in oil prices could mark the start of a bear market.

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Proxy conflict, not war

On Wednesday, the geopolitical risk increased after Iran attacked two US military bases in Iraq with ballistic missiles. However, Iran’s missile strikes were carefully executed with no casualties or property damage.

In a new development, two rockets were fired at Baghdad after President Trump’s speech, based on a CNBC report. In the speech, President Trump said, “Iran appears to be standing down, which is a good thing for all parties concerned and a very good thing for the world.” However, the reality could be different.

Meanwhile, in Yemen, the US accused Iran of sponsoring proxy conflict against Saudi Arabia and US interests. Last year, after a series of failed attempts, Iran-backed Houthis successfully hit Saudi Arabia’s oil infrastructure. Now, Saudi Arabia seeks peace with Houthis to prevent more attacks on Aramco oil facilities.

Iran can’t afford a direct war with the US. The country’s economy is already struggling due to US sanctions. Iran’s crude oil exports are its economic lifeline. The exports have fallen below 1 MMbpd (million barrels per day). However, an accelerating proxy conflict might help Iran renegotiate the nuclear deal with the Trump administration.

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A sustainable spike in oil prices?

In Iraq, Iran could quickly accelerate a proxy conflict against US interests with the help of local militia. Any news of additional conflict could push oil prices up. However, the rise might not be sustainable.

In September, after Houthis drone strikes crippled a portion of Aramco’s oil output, crude oil prices rose around 15%. However, after a few trading sessions, the gains evaporated and a downward trend started due to oversupply concerns. Investors need to careful of any false buy signals. Read Are We Seeing Soleimani’s Bull Trap for Oil Prices? to learn more.

EIA’s report

On Wednesday, the EIA released the Weekly Petroleum Status Report for last week. The EIA’s gasoline inventories fell by approximately 1.3 MMbbls (million barrels). A Reuters poll predicted a decline of just 0.09 MMbbls. The US crude oil production was at 12.9 MMbpd—a record high since 1983.

US exports were also higher. Last week, US crude oil exports’ four-week moving average was at 3.6 MMbpd—the highest level since 1991. In December, the expansion in the Brent-WTI spread could be behind the rise in exports. 

Surprisingly, the EIA’s US crude oil inventories level rose around 1.2 MMbbls, while a Reuters poll suggested a decline of 3.6 MMbbls. The inventories spread, which is the difference between oil inventories and their five-year average, was at zero percentage—unchanged on a week-over-week basis. However, if the inventories spread moves into the negative territory this week, it could be a bullish driver for oil prices.

Ride Rising Inventories Spread Might Drag Oil Prices to learn more.

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