WTI Crude Oil Prices Most Likely Will Head South After Obama Administrationís Second Thoughts on Iran Sanctions

Witawat (Ed) Wijaranakula, Ph.D.
Thu Dec 31, 2015

The spot WTI crude oil price was on a roller coaster ride on Thursday, as it surged 2.61% to an intraday high of $37.79 a barrel, before pulling back to close at $37.07 a barrel, after Iranian President Hassan Rouhani went on T.V. and issued an order calling for the countryís Defense Ministry to expedite efforts for boosting Iran's missile power. This was in response to reports of the U.S. plans for imposing fresh sanctions on Tehran over Iran's test-launching of a medium-range ballistic missile in October, in violation of U.N. resolutions.

According to a report by The Wall Street Journal published at 7:01 p.m. ET on Thursday, the White House sent a notification to Congress on Wednesday morning that the U.S. Treasury Department would announce, at 10:30 a.m. ET, new sanctions on nearly a dozen companies and individuals in Iran, Hong Kong and the United Arab Emirates for their alleged role in developing Iranís ballistic missile program.

At 10 p.m. ET on Wednesday, the White House informed Congress that it had delayed its plan to impose new financial sanctions on Iran and didnít specify when they might go ahead, amid growing tensions with Iran that could jeopardize the nuclear deal struck earlier this year.

In July, the P5+1 countries, which include the U.S., Russia, U.K., France, China and Germany, announced that they reached a nuclear deal with Iran. The sanctions are supposed to be lifted, as soon as January, which could eventually pave the way for the return of about 1 million barrels a day of Iranian crude to global markets. 

Earlier in the week, the spot WTI crude oil price slid 1.34%, to close at $36.83 a barrel on Wednesday, after the U.S. Energy Information Administration (EIA) reported that U.S. commercial crude oil inventories rose to 487.4 million barrels, up 2.6 million barrels in the week ending December 25, compared to analystsí expectations of an inventory decline of 1 million barrels.

Excluding the Strategic Petroleum Reserve (SPR) of about 695.1 million barrels, U.S. crude oil inventories remain near the peak level of 490.9 million barrels set in the week ending April 24, 2015. On Tuesday, the American Petroleum Institute (API), an industry group that represents about 400 oil and natural gas corporations, said its crude oil inventory data for the week ending December 25 showed a build of 2.9 million barrels.

The EIA said stockpiles at Cushing, Oklahoma, the delivery point for WTI futures and the biggest U.S. oil-storage hub for WTI futures, rose by 892,000 barrels to 62.993 million barrels, a new record level. Total storage capacity for the site was 71.4 million barrels as of March 31, according to the EIA.

As of December 22, there are 235,119 long positions of light sweet crude oil futures, traded on the New York Mercantile Exchange (NYSE) by managed money or hedge funds, a decrease of 19,766 long positions from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC). This is compared to about 173,062 short positions, a decrease of 2,415 short positions from the previous week where light sweet crude oil contracts are traded in units of 1,000 barrels. Hedge funds increased their net short positions by about 17,351 contracts, reflecting the headline news from the global financial markets.

From our technical viewpoint, the crude oil price just bounced off the trendline support of the descending (DES) wedge chart pattern at $34.53 a barrel, as its downtrend continues in a bearish lower low chart pattern, meaning every low (L) is lower than the previous low. The breakout at $37.75 a barrel, or the August 24 resistance, failed as hedge funds are piling onto short positions of crude oil futures. In order to establish an uptrend, the crude oil price needs to break out and stay above the October high level of $50.92 per barrel. There are walls of head resistances which need to be broken first though, between $37.75 and $42.41 a barrel, that stretch out until the end of 2016.

Tim Evans, an energy analyst with Citigroup, told CNBC on Wednesday that crude oil prices face further downside risk in the first half of 2016, with OPEC holding onto hopes of pumping the competition out of business. The question of who wants to pump who out of business is subject to interpretation, though. Thus far, the U.S. and Saudi Arabia both seem to be determined to hang onto their crude oil strategies. 

The Saudi oil minister, Ali al-Naimi, told the Wall Street Journal in Riyadh on Wednesday that, ďIt is a reliable policy and we wonít change it. We will satisfy the demand of our customers. We no longer limit production. If there is demand, we will respond. We have the capacity to respond to demand,Ē he said.

Houston-based oilfield services company Baker Hughes Inc., reported on Thursday that the U.S. oil rig count fell another 2 from the previous week, to 536 for the week ended December 31, a 66.69% drop from the peak number of 1,609 in October 2014. Surprisingly, the EIA data shows that U.S. crude oil field production is down a mere 4.19% from a record high this summer, as the U.S. still produced 9.202 million barrels per day (bpd) for the week ended December 25, 2015, compared to a 30-year record high of 9.604 million bpd reported in the week ended July 3, 2015.

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