Will oil prices move higher amid increased tension with Iran?

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July 23, 2019 9:56am NYSE:USO

  • A comment by the US Secretary of State sends oil lower
  • Action speaks louder than words
  • Iran is likely to continue to provoke the US

Crude oil had a rough week as the price fell below the $60 per barrel level to a low at $54.72 per barrel before settling on July 19 at $55.63 on the nearby August futures contract. The initial selling came after China reported that GDP grew by 6.2% in the second quarter, the lowest level of economic growth on record. The ongoing trade dispute between the US and China continues to weigh more on China than the US. As China is the world’s most populous nation with the second-largest economy on the earth, the slowdown is weighing on energy demand. Crude oil remains the commodity that powers the world.

China’s economic data caused the initial move to below $60, but it was a statement from a member of the Trump administration that caused the selling to intensify.


A comment by the US Secretary of State sends oil lower

A comment by Secretary of State Mike Pompeo at a cabinet meeting caused the price of crude oil to decline further. Secretary Pompeo indicated that Iran could be ready to come to the negotiating table as economic sanctions have tightened around the neck of the theocracy in Teheran. The Trump administration walked away from the 2015 nuclear nonproliferation agreement last year and slapped sanctions on Iran. The President has said that he is willing to negotiate a new deal with the leadership of the Islamic Republic. The Trump administration has repeatedly stated it is not seeking a regime change. The comments by the Secretary of State caused oil to drop because a deal with Iran would be a giant step towards peace in the Middle East.


Action speaks louder than words

The tension between the US and Iran is nothing new; it dates back to the late 1970s and the Islamic Revolution. After the US became a party to the 2015 nuclear agreement, Iran continued to fund terrorism in the Middle East and fight a proxy war with Saudi Arabia in Yemen and on other fronts in the region. At the same time, chants of Death to America and Death to Israel never stopped in the aftermath of the 2015 deal, which is why President Trump walked away from the agreement.

After Secretary Pompeo’s comments early last week, the US shot down an Iranian drone over the Strait of Hormuz, and Iran hijacked a British oil tanker passing through the seaway. The Strait is a critical logistical route for crude oil as 20% of the world’s supplies travels from the Persian Gulf to the Gulf of Oman through the Strait of Hormuz each day. At its narrowest point, the seaway is just 21 miles wide with Iran on one side.

Source: CQG

The weekly chart shows that the price of oil closed last week slightly above the lows of the week. Price momentum and relative strength indicators were in neutral territory at just over $55.50 per barrel on July 19.

The Middle East is home to more than half the world’s crude oil reserves. The rising tension in the Middle East is likely to prevent the price from falling too far below last week’s low unless peace breaks out, which is highly unlikely.


Iran is likely to continue to provoke the US

It looks like Iran will continue to attempt to provoke the US over the coming weeks and perhaps months as the sanctions bite the Iranian economy. However, the US and Iran both do not want to fight a war.

With the US election coming up in 2020, Iran could try to wait and see if new leadership would agree to the terms of the 2015 deal. However, if President Trump wins reelection, the theocracy may find itself in a position where it must negotiate, but that is a long way off. The geopolitical chess game in the Middle East looks like it will continue to provide support to the price of crude oil. Any increase in hostilities that impact the production, refining, or logistics in the area would cause supply concerns to increase and prices to spike higher. The United States Oil Fund, LP (USO) has net assets of $1.47 billion and tracks the price of crude oil. The energy commodity is likely to experience price volatility over the coming weeks on the up and the downside.


About the Author 

Andy Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories.  Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.  Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.

The United States Oil Fund LP (USO) was trading at $11.69 per share on Tuesday morning, up $0.01 (+0.09%). Year-to-date, USO has declined -2.66%, versus a 12.46% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 109 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of StockNews.

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