WTI crude is cutting losses to near $93 now, moving well off the overnight low near $89.40. Still, there is some ways to go in recovering the opening gap lower this week. Traders were more optimistic about US-Iran developments, with eyes on a framework agreement and the potential reopening of the Strait of Hormuz.
That saw oil prices gap lower to start the week, with WTI crude from $96 levels to open below $94 on Monday.
So, what’s next as we look to the week ahead?
With respect to risk trades, there is a danger of a buy the rumour, sell the fact play taking place. As such, the case for oil prices is the direct opposite. Are we going to see a sell the rumour, buy the fact reaction to the imminent announcement of a deal?
Well, all of that will be highly dependent on what happens with the Strait of Hormuz.
The latest headlines suggest that the US and Iran are working towards establishing a 30-day timeframe to reopen the strait. That sounds great but the devil is in the details.
Iran is said to help clear mines along the waterway and also not charge any tolls. But with nuclear discussions still set to follow, it would be silly to think that they would give away their biggest leverage in talks so easily.
If anything, they will just manage the situation with a conditional reopening while maintaining strong navy presence as they are now. It will perhaps be something similar to the sort of narrative they are saying in letting more numbers through in the past week here. But as we know with that, the reality of the situation begs to differ.
As such, it will come down to how much is the US willing to turn a blind eye to the situation as they get Iran to the negotiating table on uranium instead.
As mentioned yesterday:
“I don’t see how Iran will ever agree to that as this remains their biggest leverage in negotiations. However, what I feel might happen is that Iran will show some gesture of goodwill in clearing out some mines and allow a conditional reopening – one that they will still be in charge and manage.”
That’s likely the best case scenario. And the question is, will that be good enough for the oil market?
While prices have dropped on the latest bout of optimism, the real fear is that any conditional reopening still doesn’t do much to address the supply issue in the oil market. There’s still roughly 12 million barrels per day being taken off the market with each passing day the strait remains closed. And that will only be worse if the US and Iran play to the optics but leave traffic movement along the strait as it is for another two months in trying to sort out a nuclear agreement.
In essence, traders and investors might take to the initial headlines with glee but only to realise after that nothing has changed. And when that reality hits, oil prices will have some big upside potential as the conflict extends for another good two months at the very least.
As for when that realisation might come, it could be almost immediate or in a few days. But come what may, that is the main thing that matters when looking at the current situation.
This article was written by Justin Low at investinglive.com.
