U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower on Tuesday as the Saudi’s move closer to repairing the damage from the weekend attacks on its major oil facilities. However, the markets aren’t falling apart because traders are building in a risk premium due to escalating tensions between the United States and Iran.
The price action suggests a couple of factors are in play. Firstly, traders believe the Saudi’s will move quickly in restoring production. Secondly, traders believe the world is amply supplied and three, traders believe there will not be a military response from the United States.
The evidence for this last belief is being supported by low interest in safe-haven assets. At this time, Treasury yields are firm, the Japanese Yen is lower as well as gold. If professionals felt their investments in the stock market were being threatened by war or sharply higher crude oil prices, believe me, they’d be hedging their risk in safe-haven assets.
Only Facts to Consider
In my opinion, the only factors traders should be concerned about are the timetable for repairs and the U.S. response, if any.
At this time, Saudi Aramco has not given a specific timeline for the resumption of full output. This tells me prices are likely to be underpinned, however, it doesn’t mean conclusively that prices will move beyond Monday’s highs.
Secondly, while the U.S. claims Iran was behind the attacks. The British say they aren’t sure. This greatly reduces the chances of a military strike at this time because the U.S. will need support from its allies to be successful.
I also think the attack and the aggressive rhetoric that followed probably means the U.S. and Iran won’t be meeting anytime soon. This lifts one of the bearish factors that drove prices lower last week. Remember that prices broke sharply last week after news broke that President Trump may ease sanctions on Iran. With this off the table, buyers may return to the market.
I’m looking for a rangebound trade today as investors continue to monitor the repair progress in Saudi Arabia. However, look for heightened volatility at 20:30 GMT with the release of the American Petroleum Institute Weekly Inventories report.
Traders expect the API report to show a 2.1 million barrel draw down. A larger-than-expected draw could spike prices higher. This is because the U.S. is expected to fill in any major shortfalls from the Saudi loss.
This article was originally posted on FX Empire
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