Crude oil falls sharply after Iran attack spike
Fawad Razaqzada January 8, 2020 8:42 AM
After spiking again on the back of the Iran’s retaliatory attacks on air bases housing US forces in Iraq, gold and oil prices have now returned to their levels from the day before, while stock index futures have also more than made up their overnight losses. Investors are waiting to hear from US President later on as he reacts to Iran’s attacks. If Donald Trump suggests they will take immediate military action against Iran then oil prices could spike higher again, while a more conciliatory tone could be good news for risk assets and bad for oil. So, crude oil will remain in focus as investors react to any further escalation in the US-Iran spat.
However, with Brent already surpassing $70 – hitting an overnight high of $71.28 – the upside potential is limited from here, in my view. Indeed, prices are likely to ease back sharply as the year wears on, because of a weak fundamental backdrop. In the short-term, the prospects of supply disruptions in the Middle East suggest prices could remain around current levels for a while. But soon or later investors will realise that the plentiful non-OPEC supply will more than make up for any short-term disruptions in the Middle East. If anything, these higher prices will encourage producers to ramp up output even more in order to make quick short-term profits. This will likely result in more supply than needed, causing prices to fall back – especially if there are no further escalations in the US-Iran situation. And while the OPEC+ group will do its best to keep global supply growth in check, non-OPEC crude supply looks set to increase further – not least in the US, which has become energy independent. This comes at a time of softer global demand growth and as alternative energy supply is on the rise while sales of electric vehicles are booming. The outlook for crude oil is therefore looking more subdued than suggested by current market prices.
But with the ongoing situation in the Middle East, calling the top is very tricky – has it ever been easy? Still, today’s large inverted hammer candle (yet to be completed) and the latest failure to hold above the key $70 hurdle suggests at least a short-term top may be in for Brent. Prices are still holding above some key support levels such as $67.50 but the bulls’ first line of defense around $68.50 has been broken. Together, these are early signs of a possible trend reversal. However, it is early days and if Brent were to go back above $70 and hold there on a closing basis, then the bearish idea would become invalidated.
Source: Trading View and FOREX.com.
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