Crude Oil prices retrace from recent highs

Marius Paun | London, UK | Senior dealer | Wednesday, 22nd January 2020

We saw Brent crude oil has a strong start in 2020 reaching a recent high of over $71.00. The reasons behind the rally were largely geopolitical mainly due to renewed confrontation in the Middle East between the US and Iran. Recent events in the Eastern Mediterranean which has the potential to become another hot spot also lent support to energy prices.

Let’s look at these factors in more detail:

Following the American invasion of Iraq in 2003, it became a geostrategic necessity for Tehran to control, or at least neutralize, the regime in Baghdad. They achieved this by using various groups abroad in countries like Lebanon, Syria and Yemen. The victory against the Islamic State reduced the need for a sizeable US military contingent, so a significant part of US troops went home. Suddenly Iran found itself in a position where they could project massive influence in the region, and they did through strategies designed by elite generals like Qasem Soleimani. In Washington’s eyes that was a threat to the fragile stability being nourished in the Middle East, something they could not afford. so, they killed Soleimani in an airstrike in Baghdad.

To a lesser extent, oil prices were also supported by the Turkish Parliament approving a military deployment in Libya in early January. Previously, Turkey announced its intention to expand its economic zone in the Eastern Mediterranean region by collaboration with Libya’s Government of National Accord (GNA), which importantly has the backing of the United Nations. The move was meant to defend GNA against insurgent forces led by General Khalifa Haftar. One main motive is undoubtedly oil. Turkey has been trying for a long time to diversify its energy sources knowing that it cannot become a significant regional power without achieving that goal. Right now, they seem too energy-dependent on Russia, which supports Haftar’s Libyan National Army, the challenger.

During the last few weeks, Libya’s crude export capacity obligations were under force majeure (meaning a waiver on its contractual promises) following oil pipelines blockades across the country. As a result, state oil company NOC warned that a halt in crude exports for an extended period could ‘fill the local storage tanks within days’ and in turn slow the production to 72,000 barrels per day. By comparison, Libya had a production of 1.2 million barrels per day recently.

Despite all those tensions Brent crude retraced to just below $63.00 currently. Let’s look at the reasons weighing on prices.

Japan’s petroleum body reported that ‘any potential disruptions could be offset by increased output from the OPEC, which could limit the impact on global oil markets. OPEC’s spare capacity is in excess of 3 million barrels per day so more than enough to counter Libya’s whole production’.

On top of that, the International Monetary Fund has revised downwards its global economic growth forecasts to 3.3% from projections of 3.4% growth, made late last year. Additionally, the demand for risky assets undoubtedly eased this week on the back of fears of contagion from a Coronavirus outbreak in China. Media confirmed the US identified the first case of this new mysterious virus in Seattle. Chinese President Xi Jinping warned ‘the virus is serious and it’s crucial to take every possible measure to combat it’.

The chart shows the short-term moving averages (red line) crossing below the longer-term one (blue line), both pointing downwards and the price is below them. So the momentum has now shifted to bearish.

On the upside, a rebound above the 50% Fibonacci retracement at 63.65 will open the doors for the bulls to test resistance at $64.50. If that breach is confirmed than buyers will be looking to next target at $65.60. Ultimately only a rally above $71.08, the high of January 8ththis year, will re-establish the bullish long-term trend.

On the downside, the immediate support can be seen around $63.00 mark which so far today has held. A move below that will signal the sellers are getting serious. Next in line for them is supported just above $62.00 which matches the 61.8% Fibonacci retracement.

For now, the long-term trend outlook is looking sideways.