The excitement in the oil markets have subsided somewhat after the strike on the Iranian General, but the fear of what is coming next still lurks. These events usually cause a pop higher in the oil markets and volatility spikes. Now, it is trickier to figure out where the crude oil market is heading when the next attack could happen at any time.
The trend has been higher on crude in the last few months, but the longer-term picture basically shows the market pushing to the higher end of its range. Oil has been fairly range bound between 50 and $70 a barrel. $50 proved to be very strong support for oil in 2019 and the price rallied sharply after the third major test of that level.
It is unclear whether the market is establishing a new trend higher or simply bouncing in a range. With the current price near $62.50, there might not be too much room left to the upside unless there is a catalyst to establish new levels for this market.
One interesting note is that inventories have been dropping more than expected in the few weeks. This pattern may continue in the future as exports have been strong. The wild card is whether Iran will press the retaliation game.
The US and Iran are both threatening retaliation, but will either party cross the line where there is no going back? Iran certainly has more to lose in this game. The US could severely cripple them both militarily and economically, which they cannot afford. There will certainly be casualties on both sides of this type of battle and it could get ugly. The only real reason I see Iran crossing that line is to save face. However, if they do, the outlook is bleak for them.
In my opinion, logic will probably prevail – as crazy as that sounds. There will probably be some back and forth threats between US and Iran, but this could fizzle after a short period. Some of the volatility and risk premium will drain from the oil markets under this scenario, but the downside should be limited.
If Iran decides to retaliate, crude oil could test $70. It will really depend on what is at risk from a retaliation(s). Damage to oil infrastructure and shipping is the main concern to the oil markets. There is also the threat to increased destabilization in the Middle East, which will likely warrant an increased risk premium.
Buying on the dips in crude oil is probably the best course of action. Chasing rallies on news events is probably not a good idea. I would recommend hedging for anyone who tries to play the short side of the market, as a news event can happen at any time and prices can spike quickly.
