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The question of rising oil prices depends on three factors. First, the effect of sanctions on crude oil exports from Iran. Secondly, the extent to which OPEC and NOPEC members are willing to increase production levels to counter the expected drop in supply. And third, the gravity of the trade war. The two countries must stop doing otherwise to threaten a global recession or serious distortions in international trade. However, neither Trump nor China has suggested reconciliation.
As I explained in an article published last month, the two main drivers of oil remain the Iranian sanctions and the trade war. Considering the two factors as an end of the continuum and oil prices, at least until November 4, are likely to oscillate along the same continuum. 85 bbl. and $ 75 billion. for Brent and WTI, respectively, a psychological cap, even though prices struggled to break the $ 80 (and the $ 71 barrier) and sustain those gains.
According to recent data from S & P Global Platts, Iran's oil and condensate exports increased by 1.48 million b / d from 1 August to 15 August for the period from 1 September to 15 September. It is instructive to note here that China and India account for nearly 50% of Iran's oil exports. Both have withstood the halt of oil imports from Iran. According to Platts, India's oil trade with Iran, although declining last month, is expected to pick up later this month. It is also working to obtain waivers, with the United States last month demonstrating its willingness to review exemptions on a case-by-case basis. China has categorically refused to stop buying Iranian oil. China imported nearly double the amount of oil from Iran in September compared with August, 813,333 b / d and 466,333 b / d, respectively.
Although the figures are not promising and clearly show a drop in Iran's total exports, it is reasonable to conclude that the full effect of the sanctions has not yet been realized.
The second factor closely related to the point above is the question of other producers, OPEC and NOPEC, which increases production to offset the effect. The OPEC Joint Ministerial Monitoring Committee, meeting in Algiers on Sunday, was very important in this regard. Although JMMC did not agree to an immediate increase in production, it said the group needed to bring the compliance rate back to 100%, which means it will boost production in the coming months. The way they will do it is not clear, Kuwait-Saudi Arabia is the only producer of the group to have this ability. At their November 11 meeting, we should not be surprised as the group decides to intervene to make up for the loss of barrels.
Everything will depend on the scale of the losses resulting from the Iranian sanctions. We should also consider the fact that rising oil prices are also affecting future demand in consumer countries like China. Therefore, prices must reach a peak.
The third factor that weighs more heavily on oil prices is the ongoing trade war between the United States and China. Recall that there were trade negotiations last month that ended without any positive results. Now that the Trump administration has imposed another round of tariffs, totaling $ 200 billion this time, with $ 267 billion more, the future looks uncertain.
Recently, US Treasury Secretary Steve Mnuchin proposed to China another trade exchange, but the talks were canceled. This was expected from departure. Now that China has responded with $ 60 billion in counter-tariffs, the situation is heating up to the point of no return. China is now looking at other ways, such as tweaking the supply chain and imposing special tariffs on the most imported goods from the United States. Therefore, the effects of trade war should not be underestimated as they may threaten the current rules-based international trade order.
To return to our question about rising oil prices, we must consider the interaction of all the factors described above. Then we could come to the conclusion that the price rally could be a little overestimated. Traders have already reduced the price of crude to the effect of sanctions on Iran. Therefore, we should not be surprised if we see a correction as we approach the November 4th deadline.
What's in it for investors?
A good strategy is to short-circuit the oil in the next few days. But now, the question: when should we shorten it? Last week, oil broke resistance of $ 80 for the first time since May 18 and WTI hit $ 71.22. Oil prices then returned to the range of $ 68 to $ 69. Tropical storm "Florence" has wreaked havoc in the southeastern United States this month. The hurricane season and declining inventories have pushed oil prices to an even higher level. But the trade war remains a bearish factor that weighs on prices. Therefore, I suggest that any price between $ 68.90 to $ 72.50 for the WTI (CL1) and nearly $ 82 for the Brent (BZ) is the best choice for short selling., with a profit target of $ 2 in mind. In October, Trump could also proceed with the publication of Strategic Petroleum Reserves (SPR), which could provide another opportunity to profit from an expected decline, which could happen before traders weigh in the outlook . ETFs like USO and BNO are good options.
Result for Investors – Selling short oil levels described above is a safer bet than staying long. Prices have already fallen significantly.
Disclosure: I / we have no position in the actions mentioned, but I can set up a short position on the USO in the next 72 hours.
I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.
Additional disclosure: How does this "disclosure" affect my analysis … or not?
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