Crude Oil Stages Sharp Recovery on US/Middle East Tension

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Oil prices have had a very volatile start to the week indeed. Yesterday, as the market reacted to news of President Trump’s fresh trade tariff threats to China, crude was initially heavily sold. Trump announced on Twitter that as of Friday, levies would be changed. He would be increasing current 10% levies to 25% on $200 billion worth of Chinese goods. This is due to the stale and difficult nature of current trade negotiations with the world’s second-largest economy. Trump accused China of trying to re-negotiate, stating that talks were taking too long. Given the potential for heavy, negative impact on China, the world’s largest consumer of oil, oil prices took a hit.

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Aggressive Military Policy A Concern

However, crude prices then put in an impressive rally. Prices exploded higher as the market reacted to news that Trump had sent warships to the Middle East. The US National Security Adviser, John Bolton, told reporters that a carrier strike group and a bomber task force were being deployed by the US government. This was in order to deter any Iranian aggression which he said would be met by America with “unrelenting force”.

The context behind this move is particularly alarming. Bolton has previously spooked the market by reportedly requesting that the government draw up plans for a military strike on Iran. This announcement comes just a week after the US sanction waivers expiration with the US pursuing its goal of cutting off Iranian oil exports.

OPEC Production Cuts Support

This year, oil prices have been on a higher steady run. This is in light of the ongoing OPEC production cuts which have bolstered the market. A group of allied nations led by Russia, alongside OPEC, began the cuts began in January and they are due to end in June. However, there is speculation that OPEC will look to extend the cuts when it meets in Vienna next month.

Trump Sounding Off

President Trump has been highly critical of the production cuts. He has been very vocal in his addresses both to OPEC and Saudi Arabia specifically. In a bid to bring prices down, Trump called for a step up in production. In direct conflict with OPEC production cuts, US crude producers have been ramping up production with it reaching record highs. Indeed, in its latest outlook, the EIA forecasts US crude production over 2019 to surpass earlier projections.

Waiting Game

The prospect of further Middle East conflict is a bullish driver for oil traders as the US administration is caught in a difficult situation. This has also been the case with Venezuela, where its sanctions and policies are responsible for driving oil prices higher. For now, the market waits to hear the next development within this situation.

Technical Perspective

oil chart

The sell-off in oil yesterday saw price crashing down to test the 60.47 level support. Prices even pierced below it briefly before making a sharp recovery. As of writing, the market is sitting just above the 61.89 level. This keeps focus on a further grind higher, back towards 64.38.

oil chart h4

Indeed, on lower timeframes, we can view this correction as a bull flag formation, keeping focus on an eventual break higher in line with the dominant trend this year. A break below 60.47, however, will negate the near term bullish bias.

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