Analysts warn: The market might be ahead of itself with the recent Oil selloff
- WTI Oil remains depressed near $80 amid hopes of a new round of talks between the US and Iran.
- Analysts from major commercial banks warn that the market might have overreacted to a fragile truce.
- Some analysts affirm that a sustained decline in Oil prices would require free traffic through the Strait of Hormuz.
Crude Oil prices hold at one-week lows on Tuesday, after having depreciated more than 12% from last week's highs. The US benchmark West Texas Intermediate (WTI) barrel remains pinned near the $80 level at the time of writing as investors cling to hopes that the fragile truce in the Middle East will lead to a new round of peace talks. Market analysts, however, warn about the risks of overenthusiasm.
Commodity experts at ING observe that “the oil market continues to sell off heavily,” as US President Donald Trump signals that talks are under way with a “good chance” of a deal. However, they warn that Trump also said that “strikes would resume in the event a deal fails to materialise.”
Traffic through the Strait of Hormuz should resume to sustain lower Crude prices
ING analysts add that for this move to be sustained, "we will need to see a recovery in flows through the strait," and remind that “one would expect that the market will need to continue to price in a large risk premium, given that recent events have demonstrated how quickly a deal can unravel.”
Societe Generale strikes a similarly cautious tone, arguing that “a return to pre-war and early July levels is a big ask without fully-fledged commitment to peace and re-opening of the Strait of Hormuz.” The bank’s commodity analysts estimate that “every month without a lasting resolution adds at least $10/bbl to Brent prices,” while also highlighting that President Trump “warned strikes on Iran would resume if a new ceasefire deal is not reached.”
Past experiences suggest that tensions can re-escalate fast
In the same line, Rabobank points out that while “energy prices have fallen by around $10/bbl from last week,” risks of “a full-scale re-escalation and persistent disruptions to the Strait of Hormuz, and the Bab el-Mandeb Strait, could fuel inflationary pressures in the US.”
Rabobank also stresses that weekend announcements that Trump was “pausing” strikes on Iran “doesn’t mean that Iran has paused strikes against its neighbors,” keeping the geopolitical backdrop fragile.
From a currency perspective, MUFG notes that “the decline in oil prices yesterday has provided a breather for several Asian currencies, yet sharing concerns about "how quickly Middle East tensions can escalate.”
WTI Oil FAQs
WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.
Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.
The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.
OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
