Oil reverses earlier gains, sinks below $75
The Iran walk-out of war negotiations and the ongoing fighting in Lebanon haven’t derailed the oil selloff. On the weekend, J.D. Vance brushed aside ceasefire violations and Iran’s negotiators did agree to steps towards a lasting deal. All sides seem to be saying the right things in between threats to go back to war.
With that, an early rise in crude to as high as $78.96 has quickly reversed and it now trades at $74.81. The focus now is Friday’s intraday low of $73.58 and a break would be the lowest since early March.
In effect, the war rally in oil has been wiped out, which is a truly remarkable result given that massive amount of oil that was removed for 100 days (and counting). There is an increasing realization that the swing factors have been:
1) Reserve releases from the US, Japan and others
2) China lowering imports by 4 million barrels per day, and using its supplies instead
3) Commercial inventories sold down on the belief/expectation the war would end
The risk is that all those go into reverse as the war ends. Government and commercial reserves will need to be rebuilt, adding a bid to the oil market and keeping crude tight.
With that, I would expect a floor near $70-$75 but price action is certainly making me question it. I suspect the tide will turn if/when China steps back into the market but they operate opaquely and it’s still now clear how they were able to drop imports so dramatically.
On the downside, there isn’t much technical support below Friday’s low with nothing standing in the way of $70 at the big figure or the pre-war levels near $67. My fear is that if we get back down there on the fundamentals then it means that oil is almost-permanently impaired as it indicates that the economy can manage the biggest supply disruption in history and is still relatively loose.
This article was written by Adam Button at investinglive.com.