Heightened Risk to Influence Oil Prices

Breaking Update: Yesterday, Iran fired missiles at military bases in Iraq where U.S. soldiers and personnel were stationed. Damage is still being assessed, and U.S. President Trump is scheduled to comment this morning. The article and video below were written and recorded before those events. After an immediate spike, the price of crude oil has pared its gains.

Story Highlights

Oil prices jumped 3% higher after last week’s U.S. drone strike.
And while it makes sense to prepare for higher prices, it’s the wrong bet today.
John Ross breaks down his analysis on the short-term price of oil — and how you might play it in the weeks ahead.

Iran vowed to retaliate after last week’s U.S. drone strike killed General Qassem Soleimani. He was the Iranian military’s mover and shaker in its Middle East operations.

That news propelled oil prices 3% higher on Friday.

It’s tempting to expect prices to keep rising because oil supplies might get disrupted.

Sure, it makes sense to prepare for higher prices down the road.

But my analysis shows that it’s the wrong bet for today.

I’m looking for the price to drop as much as 10% — to $56.50 per barrel — in the next six weeks before it’s ready to continue climbing.

This chart of crude oil futures explains why the oil price will hit resistance.

Risky Oil Bulls Are Too Bullish

The black line on the chart above is the price of crude oil.

And the blue line is the bullish positioning of money managers trading it.

Money managers speculate on the price of commodity futures such as crude oil.

These types of traders build up bullish and bearish positions based on how they expect prices to move.

When their positioning becomes lopsided, it unwinds and the underlying price trend reverses.

Crude oil traders are the most bullish they’ve been since April 2019.

That’s a relative extreme, and it could pose a hurdle for the bulls and the price of oil.

Crude oil’s trend has been up since early October. If the bulls lose interest, there will be no new buying to push prices higher.

Traders Shouldn’t Depend on Middle East Conflict

The conflict between the U.S. and Iran could excite bulls.

Iran can control traffic in the Strait of Hormuz, a key shipping lane for crude oil trade out of the Middle East.

This potential for supply disruption — and others — could spur new buyers and lift the price of oil.

Something similar happened to supply expectations in November 2017.

Traders anticipated that OPEC would extend its agreement to cut oil production — and bullish positions broke out to a new extreme.

As a result, the oil price reached new highs. It continued rallying all the way into the second half of 2018.

It could happen again. Or not…

Crude Oil Price to Rally — but Not Yet

Based on my technical targets, the price of oil could rally between 15% and 36% in the next six months.

But not yet.

Despite conflict in the Middle East, there is no actual supply disruption right now.

Some reports suggest attacks are possible near Saudi Arabian oil infrastructure. But it’s mere speculation at this point.

Oil bulls will need more than that.

In September, I told readers to expect $60 as the floor for the price of oil. That was right after a drone strike took 50% of Saudi Arabian crude oil production offline.

That turned out to be a bad call, partly because Saudi Arabia restored the disruption in short order.

Instead of rising, the price of crude oil dropped 16% — to below $52 per barrel — in the weeks that followed.

The price didn’t get back above $60 till December 13.

I’m resisting the temptation to buy oil just because the spotlight is back on conflict in the Middle East.

I’d rather forecast a short-term ceiling on oil prices and look for a new buying opportunity in the weeks ahead.

All you traders out there: Be careful on betting too soon that the price of oil will keep rising.

Good investing,