Oil's rise: where is the ceiling?

It is well-known that tensions in the Middle East support the oil’s rise. On May 8, US president Mr. Trump announced that America would withdraw from the Iran nuclear deal and re-impose sanctions on the country.

Note: The nuclear deal was established in 2015 to make Iran reduce its nuclear activities and, as a result, not to let it build a nuclear weapon. The deal removed sanctions against Iran while allowing international nuclear inspectors to visit the country’s sites. 6 countries were involved in the deal: the United States, Britain, France, China, Russia, and Germany.

As a result of the Trump’s decision, crude oil surged. Brent and WTI reached the highs of November 2014.

But what's next? Will oil find an additional support?

Analysts are arguing on the further movement of oil and have two opposite opinions. 

On the one hand, analysts see Iranian sanctions as a great driver for the oil’s rally.

First of all, there is a threat that sanctions may affect not only Iran but other countries as well. As the US does not depend on Iranian oil exports, it may penalize countries that will not cut oil purchases from Iran. Sooner or later, they will have to abandon Iranian oil. So Iran’s production will decline and crude prices will go higher.

Secondly, there is another geopolitical risk as European allies of United States (France and the UK) were against the US’s exit from the deal. Additional tensions around it will support the oil market.

Based on the factors above, there is an opinion that oil may rise to $100 per barrel if Iran’s oil production declined to level of 2015 (3.3m barrel per day).

Moreover, up to date, Brent is climbing to $80 per barrel, WTI is above $70. That is close to the aim of Saudi Arabia. So analysts predict that Saudi Arabia will support the further rise of oil continuing OPEC+ cutting program.

On the other hand, although Iranian sanctions pulled the oil prices up, some analysts do not expect a further extensive rise.

Firstly, an increase in oil was caused not only by the decision of Donald Trump but also by industry data. According to the Reuters’s pool, the volume of the oil production declined to the annual low of 32.12 million barrel per day because of the production’s fall in Venezuela and African countries. At the same time, OPEC+ complied with an agreement at 162%. An additional encouraging factor for the oil rise was the data on US crude oil inventories. According to it, the number of oil reserves declined by 2.2 million barrel.

Secondly, the Trump’s decision was predictable, the risk was already taken into account. That is why oil has already reached levels it should reach.

Thirdly, even if Iran’s oil production goes down, the country will benefit from the higher prices. Furthermore, Iran is used to working in an unstable environment of sanctions. So the country will be able to establish relationships with other major players in the region.

The last but not least, there is a possibility that Mr. Trump is just playing to get a better negotiation for the US. According to Treasury Secretary Steven Mnuchin, the aim of the withdrawal was not to isolate Iran but to make Iran and other parties enter a new agreement (the one that Mr. Trump will like more). So after a while, a new agreement may be made.

Based on the above, traders should not rely on the spike of crude. According to previous forecasts, oil will trade in the range of $60-$70.

In addition, it is worth saying about a correlation between the Canadian dollar and the oil market. When oil rises, the Canadian dollar increases, as a result, the USD/CAD pair declines. So the future movement of USD/CAD will highly depend on the oil prices.

To conclude, we can say that the oil market remains highly volatile. The further movement will depend not only on a reaction of Iran and actions of the US but on OPEC+ program and the US crude inventories.

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