Oil Prices: Has Most of the Fear Been Priced In?

President Donald Trump just announced the U.S. would withdraw from the Iran nuclear deal and again impose economic sanctions in early May 2018.

And of course, the fear of that sent oil to nearly $71 a barrel.

But analysts didn’t think we'd see a super-spike, as many had feared.

While sanctions could reduce Iranian output by about 200,000 barrels per day (bpd), it may not cause much harm. That’s because the world is still awash in supply. Plus, any shortfall from Iran was likely to be replaced by America’s own oil production, which is expected to hit a record 11 million bpd by late 2018.

Saudi Arabia even had the ability to increase supply.


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At the same time, many analysts also believe some nations will ignore the new U.S. sanctions and continue buying Iranian crude. China, Iran's largest customer, may be especially reluctant to cut Iran off because of the recent trade tensions, too.

“One of the most important deadlines for oil markets was today, with the announcement the U.S. is reinstating sanctions against Iran,” said Luisa Palacios, a director at Medley Global Advisors, as quoted by World Oil. “The second most important deadline is May 20, when Venezuela holds presidential elections.”

In fact there were fears that Venezuela elections could trigger new sanctions, which could impact oil or refined product flows. The U.S. has already said it could impose further sanctions if it believed democracy was being undermined.

At the time, Venezuela had already seen output fall almost 40% since 2015, to 1.5 MMbpd thanks to political turmoil and an economic meltdown under President Nicolas Maduro. Now, with global creditors eyeing Venezuelan assets and the U.S. considering more sanctions, production could drop further, to 1 MMbpd, said Societe Generale analysts.

In the meantime, there were other factors pushing up prices, including uncertainties around elections this month in Iraq.

Iraqis were also heading to the polls to elect a new national parliament, which would serve as the basis for forming a new government. Unfortunately, unlike 2014 and 2010, “when large coalitions encompassing a wide spectrum of political groups ran, the 2018 election landscape is splintered by intra-sectarian divisions and fragmented Shia, Sunni and Kurdish factions,” noted the Iraq Oil Report.

Of course, the supply and demand picture will always have an impact.

But we also have to ask ourselves – have oil traders become far too greedy at this point.

Technically, an argument could be made in early May 2018 that oil was in fact overbought.

If we look at the price of oil over last year, we can see that even with supply-demand issues, each time the upper Bollinger Band (2,20) was hit coupled with an over-extension into overbought territory on RSI, MACD and Williams’ %R, we began to see a pivot lower not long after.

In early May 2018, that's exactly what we were seeing initial signs of.

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