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Is Middle East Tension Really Affecting Oil Prices?

May 24, 2019
BY Emma Richards

It’s no secret that Iran and the US are not on good terms. There’s been tension since the 80s, and every now and again something happens to revive the threat of conflict. Recently, Iran took measures to disrupt the world’s oil supplies and the White House took this as a provocation aimed at the US. When alleged Iranian acts of sabotage threatened four tankers near the Persian Gulf, the world media took a lot of conjecture and speculation and fueled the conflict further with provocative headlines.

With all this political tension in the Middle East, oil traders are no doubt wondering what to expect from crude prices in the coming quarter, especially since OPEC intends to continue withholding supplies in 2019. Add to that the concerns that an extended Sino-US trade war may well lead to an economic slowdown, and it’s no wonder that all eyes are on oil prices. But is Iran the cause of the price shift, or is it just part of the effect of something bigger?

Who said what?

After a suspected Iranian militia “rocket” hit Baghdad, President Donald Trump told Iran that the US would retaliate with “force” if Iran threatens any US interests in the Middle East. Iran responded by saying it will resist US pressure, then it declined further talks with the US under such circumstances.

Oil prices in the last six months

Long-term oil shows a low spike on December 24 (bottom left), followed by a long rally.

ANZ Bank has issued a “risk premium” alert for crude oil prices this week, possibly “fueled” by the Middle Eastern conflict that has hit the headlines of just about every major media outlet in the world. But crude oil traders are seeing conflicting reports about this latest political drama and how prices are reacting.

Crude oil has been on an upward trend since February 2016 after it hit a 16-year low of $36 per barrel. For the last 3 years oil has—as expected—consistently risen, hitting a $70 mark last summer. Then, in September 2018, the upward trend lost momentum and a 3-month bearish period began.

December 2018. The bear began to hibernate at $46, and a bull began to run—a rally that sent oil prices up to today’s $63.

So just how much has the crude oil price suffered?

Oil prices fell over the last week, contrary to the fear-mongering of the world’s media.

Days after Sunday’s so-called strike on Baghdad’s green zone, oil prices dropped from $73.21 to $72.09. Then the media jumped on the oil train, and prices increased—although only by around $0.30. Compare that to the price fluctuations of the week prior to the rocket attack, which ranged from $60.96 up to $63.90.

So just what started the global predictions of coming oil price hikes? Once again, the power of the media and its influence on market prices can be seen—the essence of fundamental analysis.

Interestingly, 44% of China’s crude oil suppliers are in the Middle East, and both Iran and Iraq play a major part in that supply chain. Now consider what prompted Trump—and later the US media—to escalate the conflict. Unconfirmed intelligence that indicated a “heightened risk” that Iranian forces were “considering” an “imminent attack” on American forces. The attack that followed came in the form of a single rocket, which landed over a mile from the US Embassy, causing zero casualties.

What does all this mean for oil traders?

Technical analysis offers very little value when it comes to forecasting oil right now. And the media’s aggressive stance on the recent events makes fundamental analysis even less helpful. We at FX News recommend that you keep current on Middle Eastern events, but keep an open mind about what the media channels are saying.

If you really have to trade oil, prices have been rising for quite some time, and as traders often say, what goes up must come down. If the whole world is forecasting and expecting further rises in oil prices, then a Sell order in the coming days will certainly be ahead of both the curve and the crowd.

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