With the recent string of weak economic data worldwide, one would think that the market sentiment for oil prices would be negative. Even the International Energy Agency (IEA) is expecting lower demand for oil next year due to weaker worldwide economic growth. So why are oil prices moving up, and is this market sentiment here to stay?
As with many areas of investing, the market sentiment for oil prices is very complex. End-user demand is obviously very important. Over the last decade, we’ve seen the massive growth of emerging nations like China. The country’s increased use of oil has increased global demand with the end result that oil prices have moved up sharply. This market sentiment is now being thwarted with a slowdown in the Chinese economy. This can be best seen by the fact that China is importing oil at the lowest level in nine months, yet oil prices still remain elevated.
Oil is one of the commodities most sensitive to geopolitical events in the Middle East. Following last weekend, Israeli Prime Minister Benjamin Netanyahu stated, once again, that the biggest threat to Israel is Iran developing nuclear weapons. Recent reports that Iran is increasing its nuclear armament progress have increased investors’ market sentiment towards oil prices once again. With worries about a potential war, oil prices have once again started moving up, as the market sentiment is getting scared of not being caught short in this commodity.
Will Israel launch an attack on Iran’s nuclear facilities? No one can know that answer except the Israeli leaders, but we can see from the chart of oil prices that investors are certainly anticipating such a move. When one considers the current market sentiment weighed against the backdrop of the worldwide economy, oil prices should be trading at much lower levels. The geopolitical risks are now weighing on the market sentiment for oil prices, and this situation is unlikely to end anytime soon.
Chart courtesy of www.StockCharts.com.
With one rumor after another fueling the market sentiment debate for oil, one thing is highly likely; an attack on Iran should result in a move up for oil prices, at least in the short term. At this point, Iranian oil supply is not a major factor on world oil prices, as the embargo has closed the door to many of the country’s clients. However, there would most likely be a spike in oil prices as a knee-jerk reaction and it might actually offer active traders an opportunity to profit from such a short-term spike.
If the attack were to trigger increased regional tensions among other Middle East countries, then that is something different altogether. The impact on market sentiment and reaction in oil prices would be severe if the attacks were not short-lived and temporary. At this point, with oil prices forming a base at the 200-day moving average, it is highly probable that we can see a continuation in this current move up.
Only time will tell if and when Israel will launch an attack. But with the repeated warnings from Israeli leaders, I think it would be extremely dangerous for an investor to go short-betting that oil prices will decline anytime soon. As the old saying goes, the trend is your friend until it ends.