Crude Oil review

While developments in Venezuela acted as a headwind for oil prices, events surrounding Iran provided clear support. Expectations of an influx of cheaper supply from Latin America pushed Brent crude to its lowest level in eight months. However, escalating tensions in the Middle East helped North Sea crude find a floor and rebound. The four-day rally in black gold highlights a renewed rise in geopolitical risk premiums.

According to Capital Economics, mass protests, oil workers' strikes, the blockade of the shadow fleet, and Tehran's threats to close the Strait of Hormuz could push Brent prices up by $15-20 per barrel.

Iran is a much larger oil producer than Venezuela, ranking fourth in OPEC. It accounts for about 3% of global production, or 3.3 million barrels per day. Exports are estimated at 2 million barrels per day, with about 90% going to China. The country's share of China's black gold imports is estimated at 15%. Venezuela's share is only 2%. Western sanctions have significantly undermined Tehran's potential. At the peak of its glory in the 1970s, Iran's share of global production was 10%.

Investors are hedging against the risks of Brent's rally continuing at its fastest pace since the joint US-Israeli attack on Iran last summer. At the same time, the market is considering two key scenarios for further developments. Either there will be a supply crisis, or the resumption of the trade war between the United States and China will deal a blow to the world economy and global demand for oil. Following Donald Trump's announcement of additional 25% tariffs on countries doing business with Tehran, such a scenario is quite likely. 

Such a rapid rally in Brent would not have happened if speculators had not built up huge short positions in North Sea crude against the backdrop of events in Venezuela. Their unwinding is leading to a rebound. Demand for oil call options has jumped to its highest level since October.  A significant share of them are trading with strike prices at $80 per barrel.

The FxPro Analyst Team