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Brent crude has experienced some explosive gains this year. It is up nearly 36 percent year-to-date (YTD) while WTI crude oil is up 40 percent YTD. The stellar performance in the oil market has been mainly due to the pledge made by the OPEC countries to keep the supply under a tight leash. Another factor that has kept the lid on the oil supply was the sanctions introduced by the United States on Venezuela and Iran. This is on top of the fact that we have seen some major supply disruptions in countries like Nigeria and Libya, which squeezed the supply further.
There was a major development over the weekend for the oil market. The Trump administration decided to end exemptions for purchasing Iranian oil, OPEC’s fourth largest producer of oil. This was long coming. Traders have been on the watch for the warning signs. The White House initially granted 6 months exemptions to larger buyers of Iranian oil last year. The initial plan was to curb the Iranian oil export to zero, and this is what Trump is determined to do now at any cost. This equals a loss of 700K to 800K barrels a day of Iranian oil. The fear of supply crunch is back in the market and this is pushing the oil price higher today. Having said this, Saudi Arabia, the largest producer of oil in the OPEC cartel, has assured that they will take all necessary steps to fill in the missing supply.
Traders see this as a bullish scenario. However, looking at the oil markets today, the gains are not that impressive. The WTI is up only 0.48 percent while the Brent price has gained only 0.50 percent. OPEC and the U.A.E can increase the oil supply by 1.5 million barrels a day without any hassle. Perhaps, this is the reason that the percentage gain in the oil price isn't that significant.
For WTI, the price would need to have some momentum to break above the resistance mark of $68, a price level not seen since October last year. A break of this would open the floor towards the next resistance of $70. As for the Brent price, next resistance is at $77.41, the highest point the price touched back in October. The major resistance for Brent is at the price of $80, which many investors had ruled out before the current event.
The CBOE oil volatility index has experienced the biggest surge in nearly 2 months. It is up a whopping 8.8 percent today. A major factor behind the surge is the possibility of further unrest in the geopolitical situation, especially an increase in tensions between the U.S. and Iran. Tehran isn't going to sit on its hands and watch the U.S. driving its oil export towards zero. The potential risk is that the Islamic Republic could shut down the Strait of Hormuz, the fifth largest oil traded waterway. This is just one of the many tactics that Iran has at its disposal to defend itself.
To conclude, I do not necessarily think that ending the Iranian oil export is a long-term bullish scenario for the oil market. The fact is that this has further suppressed the odds of OPEC countries keeping the oil supply curbed in their next meeting. Hence, the gains the oil market has scored on the back of this development may only be short-lived. We need major support from the demand equation, meaning stronger economic numbers out of China and the U.S. and less geopolitical tensions.
