Risk assets and commodities in general are doing well today, and that’s part of crude oil’s $3 gain today, but that’s not the whole story. West Texas Intermediate crude rose 3.9% to $77.64 in its best day in six weeks.
What drives her?
- Israel’s assassination of the political leader of Hamas in Tehran, along with a Hezbollah commander in Beirut, raises concerns about retaliation and escalation. We’ve seen this theme play out many times over the past 10 months, and the trade has always been to weaken the rise in oil prices, but this time may be different.
- There are conflicting reports but Maduro appears to have the backing of Venezuela’s military establishment. If he manages to hold on to power, the US is likely to impose tougher oil sanctions, potentially cutting off supplies. The risks are certainly mutual as there is a potential for an uprising, but for now I’m optimistic.
- The U.S. Energy Information Administration’s monthly report today showed that production fell by 61,000 barrels per day in May, the first decline since January. The lower production figure highlights the U.S. drilling shutdown that will be underscored by the recent price decline. U.S. producers will struggle to add barrels from here due to high drawdown rates and declining Tier 1 inventories.
- Weekly US oil inventory data was moderately positive.
These factors helped offset disappointing PMIs in China, although there is still hope that China will open the stimulus taps.
The crude chart shows a potential three-candle reversal, especially on a close above $77.69, but I am very skeptical about buying a geopolitically driven rally.
This article was written by Adam Bouton on www.forexlive.com.