The geopolitics of oil – why we can’t get anywhere

Kate Leaman Kate Leaman

1 March 2019

Oil Trading

Recently, we have seen the crude oil markets go back and forth in what has been an extraordinarily choppy and difficult market. Traders around the world continue to show frustration as we can’t make up our minds. However, when you look at the geopolitical makeup of the world and some of the fundamental reasons, it makes sense that very few people are willing to put huge amounts of money into the market.

Donald Trump and OPEC

In the middle of this past week, we have seen Donald Trump come out and tweet that OPEC should do something about the price of crude oil. The machines picked up this headline and sold off immediately to reach down towards the $56 region. However, just a few short days later we had turned around completely. This shows that there are people out there concerned about whether or not Donald Trump can convince OPEC to act in his interests. Remember, in 2018 he got OPEC to boost production, effectively tanking the cost of oil. However, this most recent tweet did not get OPEC to fall in line, so it looks like Donald Trump may or may not still have a direct connection to Riyadh.

Venezuela

As we continue to see the US led stance against the Maduro government in Venezuela, this has had an acceleration of the decay in the oil markets happen. The Venezuelan oil industry has been cut in half, which is a huge issue considering that Venezuela has one of the largest proven crude oil fields. This obviously will drain the supply of crude oil in the market, bringing a bit of bullish pressure. Beyond that, people are starting to become a bit more worried about what the Americans will do to Venezuela, and that of course could disrupt the flow of crude oil around the world.

US drilling

The United States now has become a net exporter of crude oil, so that brings down the demand as supply has increased. In fact, you starting to see crude oil tankers coming to the United States empty, because of the OPEC production cuts, and they are simply bypassing all of that noise to get US oil to take to customers around the world. This is a startling turn of events, showing just how rapidly the outlook for oil and production is changing around the world.

US dollar

The US dollar continues to play a major factor in the pricing of oil, as it is priced in that currency. Obviously, the stronger the US dollar, the likelier it is that oil falls in price as it takes less of them to pick up a barrel. Recently, we have seen the Federal Reserve do an about-face on the hawkish outlook, and that of course has started to soften the greenback, which could be a bit of a bullish event for the crude oil markets. Because of this, you should pay attention to the US Dollar Index as the bond markets have sent the opposite signal of the currency markets. The US dollar will ultimately be a main gauge as to where commodities overall should end up going to.

Technical pattern

Over the last several months, we have seen the crude oil markets rally significantly. When you look at the chart, it looks as if we have formed something akin to an inverse head and shoulders, so it’s very likely that people will be looking to go long. However, there has been several days in a row that the market simply can’t break out, but if we can clear the $58 region, (WTI Crude) it’s likely that the market will end up searching much higher. This would be a major break out of resistance and could send this market much higher as it would be the market deciding that oil needs to break out.

News and pundits

The news markets and most pundits believe that crude oil will continue to rally over the longer-term, so therefore it is a bit of a self-fulfilling prophecy. Because of this there are serious bids underneath, but it can’t be lost on traders that we simply can’t break out yet. However, we are looking at a major move ready to happen, and if the news and pundits are on the wrong side of the trade, we could see a massive flush.


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