Oil Prices Will Move Back To The $50s

by: Osama Rizvi

There is still no substantial factor that can take oil prices higher i.e. $70-80, even if it does, it will be temporary.

The rising tensions in the Middle-East is an unpredictable element which continues to surface every now and then.

Selling is a wise decision when oil prices rise up to a certain level. Trade war continues to put downward pressure on oil.

In my last article, I suggested a few trades and we can see it all played out quite well. By putting a stop loss at $60.30, it was suggested to take a buying position that should give $2-3 - WTI touched $63 recently. However, I stressed on selling it once it reaches a particular level ($64-66). Due to a few events and heated rhetoric, oil prices have once again inched up; however, we should not overlook or undermine the threat of trade war to which there seems no end.

A keen observer of the oil markets might agree that there is no substantial reason for oil to continue heading upwards i.e. near $70-80. Even if that happens, in a drastic turn of events such as a war or military confrontation, it will be temporary. Two factors continue to dominate the current analysis in order to track prices: OPEC's production cuts and the lingering trade war. The former, as explained in a previous article, can go both ways, bullish or bearish, but primarily bearish for reasons mentioned here. The latter, as of today, is extremely bearish as both U.S. and China have raised the stakes lately. The factor of rising tensions in the Middle-East (which we will talk about in our next article) is an unpredictable one but temporary too.

Coming back to trade war: a few months ago, many observers thought of a breakthrough as the trade-talks signaled optimism. But the whimsical manner in which President Trump handles international affairs was manifested when he tweeted, once again taking everyone by surprise, that China has reneged on its promises. After a few days, the tariffs were raised from 10 percent on $200 bn of Chinese goods to 25 percent. Ironically, both the parties were at the discussion table when that happened. Evidently, the meeting failed to reach any agreement let alone a breakthrough. China signaled for retaliation, and on 13th May 2019, imposed tariffs on $60 of goods with percentages defined in 4 tiers reaching up to 25 percent.

Such developments do not augur well for the future. The current U.S. administration has categorically mentioned that China should not retaliate and that not doing so will call for further escalation. This might put the rest of $325 bn of goods on waiting list too.

Trump is scheduled to meet Xi next month at G-20 but has already started preparing for new tariffs. Not a promising way to resolve an issue - ain't it?

Sell - for the longer term

Once again, the resistance on the upside remains $63.40. Few days back when Saudi oil tankers were attacked near Fujairah, a strategic port, the prices touched $63.30 but failed to break the said level. However, recently WTI did edge a little higher than that. There has been a surge in tensions between Iran and U.S. and rumors of a war are rife. But there are reasons to believe that saner heads will prevail. A report by U.S. Intelligence has suggested that both countries "misread each other" and Trump told Pentagon that he doesn't want a war with Iran.

On the lower side, $60.30 shows a strong support level. If it breaks that level, the next stop we would be seeing is $58.40. Further down is $54.40. Breaking that level would mean WTI at $50.

We can see this happening if Trump goes ahead with the rest of $325 bn tariffs in goods as well and/or a combination of this with an increase in production by OPEC in June. Remember that the OPEC's meeting and G-20 when Trump is supposed to meet with Xi are both at the end of June. That is going to be a very important time period indeed. A strong indication of where the trade war might be headed is the latest news of Trump blacklisting Huawei. What is more telling is that China has retaliated anew by putting a complete ban on American companies engaged in business with Huawei.

For now, watch the above levels and play it safe. Risk takers can cash some dollars as the tensions and rhetoric between Iran and U.S. are sure to heat up in the shorter term. For the longer term, we should not expect an end to the trade war any time soon. The signs do not point in that direction too.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in WTI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.