Oil focus to shift back to Iran once trade tariff resolved

Oil prices along with most risk assets are moving almost in sync on trade tariff updates.  In the event, we see a negative outcome and tariffs are implemented and China queues up retaliatory measures, we will see equities selloff harder than we will see oil prices slide.  Crude prices are likely to be supported on geopolitical risks.  West Texas Intermediate crude is roughly 9% off the April highs and we could see buyers remain in place if we see the $60 level hold.  If talks completely fell apart, US equities could tumble 10% along with crude, but that is the least likely outcome.

In the short-term, we could see the Iran situation be the biggest bullish catalyst for oil prices.  With the ending of the US sanction waivers becoming effective this month, Iranian shipments are falling sharply.  China, India, South Korea and Japan are now faced with finding a new provider for roughly 1 million barrels crude or face sanctions from the US.  While Saudi Arabia, Iraq and Russia will pick up the slack, the spare capacity available could see some delays in filling immediate needs.  Iran is definitely feeling further economic pressure as no tankers were seen leaving their terminals so far in May.  Further economic pain could see this escalate dangerously with increased Iranian actions to shutdown the Strait of Hormuz or military mobilization.

While the tariff uncertainty remains high on how this will unfold, the base case remains that a deal will get done either in May or early June.  Both the Chinese and US are applying standard negotiating tactics that could see the situation get uglier before paving the way forward for a deal.  Crude is likely to react poorly on major trade disappointments, but it should be supported on the geopolitical risks from Iran, Venezuela, and Libya.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geo-political events and monetary policies in the US, Europe, the Middle East and North Africa. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He is often quoted in leading print and online publications such as the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University. Follow Ed on Twitter @edjmoya ‏
Ed Moya