Oil Is Back To Its Regular Scheduled Programming
Geopolitical tit for tat is over? That seems to be the case for now...
I will be the first to tell you that I'm glad the geopolitical nonsense is over. Ever since the traumatizing episode of 2018 where the Iranian sanctions led to one of the worst energy sell-offs, I've been a non-believer in geopolitics. To make matters worse, the 2019 Abqaiq attack, which saw crude rally sharply only to get decimated days after left a nasty taste in my mouth.
Then 2022 came along and the Russian/Ukraine invasion happened. Oil market went nuts as the Europeans and the US sanctioned Russian oil exports. IEA boldly predicted that Russia will lose up to ~3 million b/d. The result? A spike to $125/bbl destroyed oil demand, 275 million bbls of SPR was released, and zero production was lost from Russia.
So yes, I hate geopolitics. It's been nothing but a distraction, and for anyone keeping a tally, if you sold every pop from the last 6 years, you would've made a killing. I didn't.
The only rally I sold was the one in April this year when everyone warned that WW3 was coming. Thankfully, the extremely overbought technical positions gave me comfort in knowing that the rally was a bit overextended.
And with this weekend's news unfolding, it looks like Israel chose the path of non-violence. It didn't target any oil or nuclear facilities.
As for the market, this will be disappointing news. While the Washington Post leak a while back evaporated a lot of the geopolitical risk premium, I suspect there's a bit more selling left. Dr. Anas Alhajji thinks there's another $2-$3 of downside at open, and I agree.
I think we will get a gap down on Sunday followed by a slow recovery. Refining margins will move higher as crude takes the majority of the hit. This should be a signal to traders that the fundamentals are healing.
So while this provides a theoretical floor, you just never know with the oil market. It always moves to extremes, so we could see the support level around $67 tested again (-$4 from here).