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Oil sinks by 1% while US defense has no plans to escalate further after lethal strike

  • WTI Oil trades in a loss after it popped higher in Asian trading hours on Monday. 
  • Tensions rise in Asia and the Middle East with several headlines emerging. 
  • The US Dollar Index steadies at pivotal level ahead of the US Fed rate decision and US Jobs report. 

Oil prices are in the red near 1% with the US Department of Defense issuing statements at the start of the US trading session that it does not seek broader conflict in the Red Sea region. Prices were shooting higher during the Asian session with tensions rising in the Red Sea and Middle East. Houthi rebels attacked several vessels again in the Red Sea, followed by retaliation from the United States.

Meanwhile Iran has issued a statement saying it is ready for war. Traders are offloading their bearish bets and are net long Oil this Monday.

The US Dollar Index (DXY), which is negatively correlated to Oil, is continuing the trend from past Friday, where good US data at the end of last week pushed the US Dollar Index higher. Markets are bracing for two big events that could trigger a seismic shift in the DXY: the US Federal Reserve rate decision on Wednesday, and the US Jobs Report on Friday. Depending on the outcome of both events, the DXY could be trading substantially higher or lower by Friday.  

Crude Oil (WTI) trades at $77.37 per barrel, and Brent Oil trades at $82.35 per barrel at the time of writing. 

Oil news and market movers: No battleplans 

  • Ahead of the US trading session, the US Department of Defense spokesperson Major General Patrick Ryder said on a Bloomberg interview that the US is not considering sending in troops. The US rather looks to try and defuse the situation. 
  • Traders are paring back bearish bets on oil and are even turning net long the commodity in the options market. 
  • With casualties among the US troops in Jordan, tensions are rising with US President Biden set to possibly issue even more strikes against Houthi Rebels in Yemen. 
  • Saudi Arabia Energy Minister Prince Abdulaziz bin Salman said that Saudi Arabia is looking for a stable Oil market and wants to help to ease tensions in the Red Sea. 
  • The Pentagon meanwhile has said that it is looking into additional strikes in Yemen and Iran.
  • Around 10 million barrels of Russian Oil are stranded near the coast of South Korea due to the US sanctions on Russian Oil. 

Oil Technical Analysis: Tensions ease into US session

Oil prices are reacting to the headlines that are being issued on Monday with the Pentagon getting ready for more strikes in response to fatal casualties after a drone strike by Houthis on a US base in Jordan. Pressure is building for US President Biden to deliver a firm answer and response, in order to defuse tensions in the region. Despite all this, Oil supply is still flowing while demand is still at the lower end under current economic conditions. 

To the upside, resistance at $74 is in the rear view mirror now and should act as support. Although quite far off, $80 comes into the picture should tensions build further. Once $80 is broken, $84 is next on the topside. 

As said in the paragraph above, $74 will now act as support for the nearterm on any sudden declines. The $67 level could still come into play as the next support to trade at, as it aligns with a triple bottom from June. Should that triple bottom break, a new low could be close at $64.35 – the low of May and March 2023 – as the last line of defence.

US WTI Crude Oil: Daily Chart

US WTI Crude Oil: Daily Chart

WTI Oil FAQs

What is WTI Oil?

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.

What factors drive the price of WTI Oil?

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.

How does inventory data impact the price of WTI Oil

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.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 13 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

Filip Lagaart

Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.

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