Oil — Iranian uncertainty stands ready to ramp up the volatility

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Updated: 26 November 2019

 

  • With demand and supply factors working in unison, oil futures have formed a text-book upward channel.
  • The ‘usual suspects’ of OPEC, trade-talks and global growth are guiding oil prices upwards.
  • A report by Frederick Kempe picks out the number one potential trigger of the next shock. He suggests, with good reason, that those watching the price moves should have their eyes firmly on Iran.

 

A steady drip-feed of good news from Washington and Beijing has suggested the brakes may be about to be taken off the global economy. As each of the new buzzwords such as ‘phase one’ have become more widely used, the price of oil futures has risen too. Elsewhere, the German economy released an Ifo Business Confidence report on Monday, which suggested the economy there may be bottoming out. In addition, opinion polls in the UK are tentatively pointing to the upcoming general election providing the Tory party with a majority big enough to ‘get Brexit done’ and open the door for improved certainty between the UK and EU.

On the supply side, the news from OPEC and OPEC+ producers is that the supply constraints that are currently in place, are holding and will continue to do so. The organisation does, after all, find it easier to reach an agreement on limiting supply when prices are rising. The OPEC / OPEC+ meetings taking place in the first week of December should be relatively congenial.

Reports relating to both supply and demand side drivers of oil price have tended to support upward movement. The majority of the price strength can probably be attributed to demand factors, specifically the increased likelihood of the US and China finding some form of resolution to their ongoing trade war.

 

Tracking the change

The oil price rise of the last few weeks shows little sign of reversal. The move has actually been supported by broad strength and occasional periods of price consolidation. Since 3rdOctober, and the printing of a three-month low of 51.76 the NYMEX CL1! Futures price has traded a classic up-trend. This has enough brushes with the trend line to suggest these indicators will likely hold for the foreseeable future. Those in long positions or looking for a break to the downside will be monitoring any price action near the bottom trend line very closely.

CL1! — three-month — August–November 2019:

Source: TradingView

The price moved 13.14% in the 48 days between 3rd October and 21st November. The last few trading sessions have seen a slight retreat from the peak price of 58.57 to 58.01. It’s a fairly solid price move, and the CNBC headline after the close on Monday reads:

“Oil prices steady as US-China trade deal talks seek breakthrough.”

 Source: CNBC

CL1! — three-month — August–November 2019:

Source: TradingView

 

Tracking volatility

The 3-month price chart also shows the spike in September when Saudi oil infrastructure was attacked.

Taking in a longer time scale, the year-to-date chart also shows the spikes associated with other geopolitical events.

CL1! prices rose 14.68% in the nine-day period around 20th June after Iranian forces shot down a US drone over the Straits of Hormuz. According to reports at the time, the US president ordered a military strike against IRGC radar and missile sites before reversing the decision.

Then in July, the tankers MT Riah, Stena Impero and Grace 1, were to various degrees, attacked, detained, hijacked, commandeered or found to be disappearing in the Eastern Mediterranean with cargoes of ‘illegal’ oil bound for Lebanon.

CL1! — YTD — 2019:

Source: TradingView

The markets have seen periods of steady price moves with interjections of increased volatility, brought about by one party in particular — Iran. Might the markets be due another shock? Possibly more importantly, from a P&L perspective, when might it be? Frederick Kempe president & CEO of the Atlantic Council and one of the United States’ most influential think tanks on global affairs, has released a report suggesting the continued pressure on Iran could be about to feed through as an uptick in oil volatility.

Kempe’s report for CNBC is of the ‘something has to give’ variety. As he puts it: “Iran faces its most critical moment since the 1979 Revolution” (source: CNBC).The sanctions imposed by the US are beginning to hurt. The government announced on 15th November that it would be cutting fuel subsidies, causing petrol pump prices to rise 50% overnight. Amnesty International suggests that as many as 200 people have been killed in the ensuing unrest, which has been nationwide. The fatalities are scattered over 21 cities. (Source: Amnesty International). The regime then shut down the internet for five days to limit the opportunity for contagion.

A 50% price hike of a crucial staple is not fiscal policy and taking a country completely offline for days is not an attempt to get people talking again, it’s panic stations.

The desperate measures mark the country running out of money. This has significance for the regional landscape and the price of crude. CNBC noted:

“What’s at risk for Iran are decades of investments that have transformed the country into the Mideast military and political power it is today. U.S. officials reckon Iran has spent some $16 billion on Iraq, Lebanon and Yemen since 2013 – and $10 billion on Syria. It is estimated to spend $700 million a year on Hezbollah.”

Source: CNBC

Kempe’s report highlights that the next move by Iran may be hard to call. Iranian President Hassan Rouhani said recently:

“We all know too well that we are not in normal and easy circumstances.”

Source: CNBC

 

Timing

The last few weeks have seen oil prices move with such a measured grace that traders can be excused for forgetting the staccato nature of the price moves over a longer timeframe. On a very simplistic basis, the spikes in geopolitical risk have been seen about every two months. Kempe’s report suggests we might not see ‘more of the same’ from Iran, but given the country’s deteriorating situation, the markets can expect some kind of intervention.

With the pressure building, it’s becoming a case of ‘when’ not ‘if.’ As Kempe states:

“What’s less clear is whether Tehran over the short term will respond to this historic test with more military escalation, diplomatic compromise – or a combination of both.”

Source: CNBC