The post-election rally in U.S. crude oil prices has stalled, but oil prices are certainly not giving up much ground. For the past couple of months WTI crude oil and the United States Oil ETF (NYSE: USO) have given traders very few opportunities for meaningful moves. However, considering the current global geopolitical environment, it’s unlikely oil prices will continue to trade sideways for too much longer. Here’s a look at what oil traders should be watching.
It may be that oil traders are simply watching and waiting for now until the next major oil catalyst comes along. President Donald Trump has pledged to lower corporate taxes and remove environmentally-friendly regulations that have been holding back U.S. oil and gas companies. While that’s good news for U.S. oil stocks, WTI crude prices are impacted by supply and demand, not profitability.
Instead, traders are focused on the approach Trump plans to take with Iran and OPEC. Trump has repeatedly said that he opposes the Iran nuclear agreement that lifted sanctions on one of the top global oil producers. Trump even tweeted that Iran had been “PUT ON NOTICE” for testing a ballistic missile.
If sanctions on Iran are reinstated, it would theoretically be good news for U.S. oil prices in the long-term. However, Iran could also choose to flood the market with oil in the near-term while it still can, which could lead to downward pressure for oil prices in coming months.
When the market is undecided about a commodity like oil, geopolitical headlines can always help traders make up their minds in a hurry.
Perhaps the most important thing for oil traders to watch is global and national supply, demand, and production numbers. According to the International Energy Agency, global oil supplies fell by 1.5 million bpd in January. Roughly 1 million of those 1.5 million bpd can be attributed to OPEC following its landmark production cut deal in December.
Unfortunately, the Energy Information Administration’s latest U.S. stockpile numbers were unexpectedly high. The EIA recently reported a weekly jump in crude oil inventories of 13.8 million barrels, well above estimates of a 2.5 million barrel rise.
Oil traders will be watching for any future data points for hints at where crude prices could be headed next.
Finally, traders know that charts can be excellent predictors of upcoming headlines and market numbers. The USO ETF has been trading in a tight range between $11.00 and $12.00 ever since the beginning of December. But even that range has tightened to $11.00-$11.60 in the past month.
The most convincing bullish breakout would be a move above USO’s 2015 high of $12.45, which could signal a push toward the $16 level. On the other hand, a dip below $11 would likely mean the USO is headed back down to at least the $10 level in the near-term.
Disclosure: the author holds no position in the stocks mentioned.
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