Oil Rally is Fading Despite Belligerent Rhetoric

Oil rallyingLast week the United States army assassinated Iranian leader Qasem Soleimani, who was the commander of the Quds force and a major general in the Islamic Revolutionary Guard Corps. Described as the second most powerful Iranian leader (only behind Ayatollah Ali Khamenei), it's not surprising that his death implied the escalation of the conflict between the United States and Iran.

The relationship between the United States and Iran has been continually deteriorating since President Donald Trump put an end to the United States' participation in the Nuclear Deal framework in May 2018. The deal was an accord between Iran and the permanent members of the United Nations Security Council, and its main purpose was limiting the Iranian nuclear facilities in exchange for lifting economic and financial sanctions against Iran.

After the attacks, the Iranian leadership didn't only threaten with retaliation but also announced that it didn't intend to comply with nuclear restrictions anymore, putting another nail into the coffin of the highly criticized deal, and raising concerns about a possible direct confrontation with Israel, which is one of its main rivals in the region.

The oil markets have been rallying since December, as investors' optimism regarding the future of the global economy increased following the announcement of the signing of the "phase 1" trade deal between the United States and China and data that showed some signs towards global economic growth.

Those recent events only came to aid the rally. Brent crude futures closed in positive territory on the day of the Iranian leader's killing, gaining about 3.55 percent, and during Sunday’s session, Brent crude futures added another 1.43 percent. The same could be said about Western Texas Intermediate (WTI) crude oil futures, which gained 3.06 percent on Friday and 1.28 percent on Sunday.

However, many analysts highlighted the unsustainability of the oil rally in the long run, unless there is a significant supply disruption in the market. In fact, oil futures markets closed in the negative territory on Monday, mostly due to a rebound in the US dollar and after the US claims about a potential nuclear deal with Iran, and some even put in doubt that Iran's retaliation was going to affect any important global oil supply source.

“It is not a given that any potential retaliation by Iran would target oil-producing assets,” said a Goldman Sachs analyst on Monday, quoting the recent incident at the US embassy in Iraq, which didn't imply any important supply disruption, and adding that even if there were an attack against any important oil production facilities, the market still seems to have a significant supply flexibility.

The analyst's claims are not unfounded. On September 14, 2019, drones were used to attack Saudi Aramco's oil processing facilities at Abqaiq and Khurais causing a decline in global oil production by 5 percent, a supply disruption that the Saudis could manage with the help of its reserve storages. By September 27 international media reported that production capacity and export levels were back to normal.

Now the press claims that the Iranian leadership is assessing 13 "retaliation scenarios" against the United States and the Iranian ambassador to China is threatening with military actions. This could bring back fear to the oil futures markets, though when it comes to the oil markets, actions are likely to speak louder than words, and markets are likely to see their biggest movements only when action is taken.

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.