uploads/2020/01/AdobeStock_260759806.jpeg

Are We Seeing Soleimani’s Bull Trap for Oil Prices?

By

Updated

In the early hours of today’s trading, WTI crude oil prices touched $65.65 per barrel, the highest point since April 26. However, at 5:42 AM ET, WTI crude oil futures were trading at $62.82 per barrel, a gain of just 0.2%. The United States Oil Fund LP (NYSEARCA:USO) tracks WTI crude oil futures. Energy stocks Chesapeake Energy (NYSE:CHK) and ConocoPhillips (NYSE:COP) are also sensitive to oil’s movements.

The spike in prices resulted from Iran’s missile strike on two military bases in Iraq where American troops are stationed. Around 6,000 American soldiers have been deployed in Iraq.

Article continues below advertisement

Soleimani’s bull trap for oil prices

However, there are no confirmed reports of any American casualties. Also, the news media hasn’t reported any significant loss of US property. Iran claimed that those missile strikes were in retaliation for Qassem Soleimani’s killing.

However, it seems that Iran was careful not to escalate the current tensions into a war with the US, which Iran can’t afford. It could be possible that Iran’s actions are more aligned to pressure the US to reconsider or provide some relief to the ongoing sanctions rather than provoke a war.

President Donald Trump tweeted just after the missile attacks, “All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.”

Traders’ long positions on oil futures could be based on a potential conflict between the US and Iran after Soleimani’s death. However, if the US doesn’t retaliate after the Iran missile attacks, it could turn out to be a bull trap for oil prices. Still, the OPEC+ production cut and the progress in the US-China trade talks could be crucial to oil’s upside. In a bull trap, investors bet on the upside in asset prices based on a false buy signal. 

Last week, Trump tweeted that if Iran retaliates after Soleimani’s killing, the US would hit Iran hard. To learn more, please read Could Trump Push Oil Prices to $100?

Article continues below advertisement

Will Trump negotiate?

Today, the UN Security Council has scheduled a meeting in New York. However, the US denied a visa to Iran’s Foreign Minister Mohammad Javad Zarif to attend the meeting. It seems that the Trump administration in no hurry to negotiate with Iran. Also, the sanctions could choke Iran’s economy. Allowing Zarif in the US could help normalize the US-Iran bilateral relationship. 

Iran is a longtime archrival of the US in the Middle East. Except for Iran, most of the important oil- and natural gas–producing countries in the Middle East are amenable to the US. Iran’s ambition to develop a nuclear weapon could destabilize the Middle East in the long term.

After the shale oil revolution in the US, energy dependence on oil imports has decreased. In the week ended December 27, 2019, US oil production rose to 12.9 MMbpd (million barrels per day). Based on the 2018 consumption rate, this is more than 60% of the US total crude oil demand. Also, the SPR’s (Strategic Petroleum Reserve) inventory level is 634.9 MMbbls (million barrels), sufficient for the United States’ energy needs for more than 30 days.

After the US Congress removed the ban on oil exports in December 2015, US oil exports have risen exponentially. The fall in Iran’s energy exports could help US oil producers increase their market share.

Article continues below advertisement

If oil prices rise substantially, Trump could speed up the pipeline approval process and allocate more federal land to US oil producers. Last year, he took similar steps when drone attacks temporarily paralyzed a significant portion of Saudi Arabia’s oil output. These factors could limit any upside in oil prices.

Moving averages and inventory

Yesterday, WTI crude oil active futures settled 3.3%, 7.4%, 10.3%, and 8.4% above their 20-, 50-, 100-, and 200-DMA (day moving averages), respectively. On January 2, the 50-DMA moved above the 200-DMA for the first time since July. This “golden cross,” a shorter-term moving average above a longer-term moving average, could be bullish for asset prices.

Yesterday, the API reported a fall of 5.9 MMbbls in crude oil inventories, 2.3 MMbbls more than the Reuters poll’s anticipated decline. However, API’s gasoline stocks rose by 6.7 MMbbls. The Reuters poll predicted a rise of 2.5 MMbbls.

If the EIA also reports a surge in gasoline inventories, it could be a concern for oil bulls. To learn more, please read Will API Inventory Data Impact Energy Stocks?

Advertisement

More From Market Realist