Crude Oil Prices Rose Due to Strike on Iran Tankers

Are higher crude oil prices here to stay?

The Brent-WTI spread hasn’t moved after the attack, which could indicate that the rise in oil prices might be short-lived. While oil prices rose 14% after drone attacks on Saudi Arabia, the spread rose slightly. The Brent-WTI spread indicates the geopolitical risk premium in oil prices. In the past, the spread widened rapidly when the oil market sensed supply shocks.

OPEC

On Thursday, OPEC’s chief hinted at a deeper cut in the December meeting. On December 6, OPEC and non-OPEC members will meet to decide further course of action. In January, OPEC plus implemented a production cut of 1.2 MMbpd (million barrels per day). In the first quarter of 2020, global oil demand exceeded the supply by 1 MMbpd. The demand will likely be higher than the supply this year. Notably, US crude oil prices are near $50 per barrel. If OPEC plus cuts production by another 0.5 MMbpd–1 MMbpd, it could help tighten the oil market.

WTI crude oil prices and supply

In recent years, the dynamic in the oil market changed. US crude oil production rose to 12.6 MMbpd (million barrels per day). Many oil producers, like Chesapeake Energy (CHK), lowered their capital expenditure guidance. The severe downfall in share prices forced management to focus on total shareholder returns. Other US upstream companies reduced their capital expenditure significantly. US crude oil production reached its all-time high last week since 1985. As a result, the US crude oil supply is resilient and could counter any fall in the global oil supply.

On Tuesday, the EIA released its STEO (Short-Term Energy Outlook) report. The EIA sees significant downside risk to oil prices in the second quarter of 2020. From last month’s estimates, the EIA expects Brent crude oil spot prices to fall by $5 per barrel in the second quarter of 2020. Brent crude oil prices could average around $57 per barrel in the same quarter. On Thursday, Brent crude oil active futures closed at $59.1 per barrel.

EIA inventory data

On Wednesday, US crude oil inventories rose by 2.9 MMbbls (million barrels). The inventories spread didn’t change. US crude oil inventories were on par with their five-year average for the third consecutive week. With the flat inventories spread, any bullish sentiments for oil prices could decline. If the inventories spread moves to the negative zone next week, there might be a short-term uptrend in US crude oil prices. Since October 8, the United States Oil Fund LP (USO) has risen 2.8%. USO follows WTI crude oil futures.

US crude oil technicals

After the attacks on Iranian oil tankers, US crude oil prices are 2.1%, 1.6%, 2.6%, and 3.9% below their 20, 50, 100, and 200-day moving averages, respectively. Prices below these moving averages indicate bearishness for oil futures. The 50-day moving average is 2.3% below the 200-day moving average, which suggests more weakness in oil prices.

According to WTI crude oil’s implied volatility of 35.4%, prices will likely close between $51.12 and $55.98 per barrel until next week. The model assumes that prices are normally distributed. The confidence level for the price range is 68%.