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Short-Term Oil Outlook: Tepid Demand, Fed Meeting, And Mideast Tensions

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Includes: BNO, OIL, OILU, OILX, WTI, WTIU
by: Osama Rizvi
Summary

There are both bullish and bearish factors present in the oil markets lately.

We might see prices rising due to inventory withdraws and interest rate cuts. Iranian tensions may also provide support.

However, prices will once again fall to $55 if the U.S. and Iran can agree to negotiate.

Tepid demand and uncertainty over U.S.-China trade talks will continue to put downward pressure on oil prices.

There has been a slew of news affecting oil markets recently. What has emerged is a perfect mix of bearish and bullish developments. As a result, prices are undergoing congestion at the moment, hovering around $56 for WTI. Oil prices will continue to fluctuate until either the bulls or the bears take over, which would move prices accordingly, and then stabilize.

Here we will discuss some important levels and a short analysis of the latest developments in the markets.

Iran seized a British oil tanker and its crew last week as tensions mounted in the Middle East. This came at a rather strange time as Muhammad Zarif, Iranian Foreign Minister, threw some overtures in what seemed a possible negotiation with the U.S. regarding sanctions and Iran’s nuclear program. He said that Iran can drop its nuclear plan if U.S. promises to end sanctions that has been crippling their economy. The tanker and crew are still being held by Iran; the latest video showing crew members was released yesterday. This seizure happened just a day after Trump said the U.S. had downed an Iranian drone.

Interestingly, none of this has had a significant effect on oil prices. There may be three reasons for this. One is that markets have yet to factor in the effects of the recent Middle East tensions. Second is slow demand and a gloomy global economic outlook, plus uncertainty regarding U.S.-China trade. Third - a very important factor - there has been very little or no actual disruption to oil flows in the region.

Stena Impero, the British vessel captured by Iran, was empty; Kokuka Congress and Front Altair, both of which were attacked last month, were not carrying large volumes of crude, but methanol and naphtha, respectively. Similarly, the recent Fujairah incident saw no oil spill, and one of the ships was empty.

IEA last year estimated global oil demand to grow by 1.5 million barrels per day (mbpd) but this year it predicts a demand growth of only 1.2 mbpd. Increasing U.S. oil production when juxtaposed with slow demand puts more pressure on prices. In June U.S.’ exports reached 3.3 mbpd, an all-time high.

However, an expected interest rate cut by FOMC (Federal Open Market Committee) as they meet by the end of this month may provide some support to the prices, given the inverse relationship between dollar and commodities. The markets have already priced it in, with now bets on whether it will be a 50- or 25-basis-point cut.

Goldman Sachs in a recent note also adopted a bullish tone mentioning factors such as positive data from the refining sector, strong macroeconomic picture and stable consumer demand. A reference to a period of lower interest rates as indicated by some major world economies was also made.

Oil will fluctuate, but in a certain range. It will be hard for WTI to break $61. But once again, any further escalation in the Iranian situation can result in oil prices testing recent highs. Similarly, if there are any signs of negotiation between the U.S. and Iran, prices could tank.

Important Levels to Watch For

$57.50 remains a strong area of near-term resistance. The latest inventory withdrawal has moved prices up to $57 again. The next key resistance will be at $60.20. If Iran and U.S. manage to agree to negotiate or if there is no further escalation we will see prices dropping once again hence making this rally a good opportunity to short. Downwards at $55, we see near-term support for oil prices. $54.50 is the area that, if breached, can result in WTI prices falling to their 2019 lows.

I opine that prices will fall once again. The interest rate announcement might trigger a rally, but that will be short-lived. Also as I noted above, the effect of an interest rate cut has already been factored in. The minutes of meeting will give us a better idea of the Fed’s tone.

Disclosure: I am/we are short WTI. 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.