The volatility in oil prices has been significant lately. This is due to several variables having an impact on what determines the appropriate level for oil prices. On the surface, oil prices should be much lower, considering the world economy; we have consistently seen slower economic numbers in most parts of the world. But if oil prices aren’t declining, what’s holding them up?
Contrary to what some might believe, it’s not a conspiracy by oil firms, but rather geopolitical risks. First, we have the recent breakout of hostilities between Turkey and Syria. The latest incident was on Wednesday, as Turkey forced down a Syrian plane, seizing what they believe was military equipment from Russia. Syria then followed with a warning to Turkey that it will use increased levels of force if such actions are repeated in the future.
All of this follows several days of artillery attacks across the border between Syria and Turkey. Investors are worried this escalation could spread to an all-out war in the region. This is obviously having a greater impact on Brent oil prices, compared to West Texas Intermediate (WTI) oil prices. While some international traders are arbitraging between the two contracts to take advantage of price discrepancies, the fact remains that North Sea Brent oil prices are significantly more at risk than WTI oil prices due to the area’s proximity to the situation.
This takes us back to an often-discussed topic: Israel and Iran. For the time being, Israel most likely won’t attack Iran due to a potential upcoming election. Benjamin Netanyahu, the Prime Minister of Israel, is ready to bring forth a proposal to dissolve the parliament and to set elections for late January.
Oil prices have recently moved up on comments from senior members of the Israeli political sphere that Iran is close to developing nuclear weapons. Obviously, any attack from either side will send oil prices skyrocketing. For the time being, with the election looming, I think Israel will wait until it receives a new mandate from its people. As it stands, Netanyahu is leading in the polls, which means he’s getting support for his political views, including taking action against Iran.
Chart courtesy of www.StockCharts.com
The technical analysis of oil prices is quite complex at the current moment. When oil prices were tanking in late June, I commented that they were far too oversold, and technical analysis indicated to me that a bounce was imminent. I also stated that the most likely area for a pullback would be the 200-day moving average (MA).
With the easy analysis completed, oil prices are in the range that makes predicting future movements via technical analysis difficult. Combined with geopolitical risks, this increases the number of variables to consider. Having said that, technical analysis indicates that the recent move up in oil prices was broken, and we have now entered a trading range. Note the Fibonacci retracement levels from the highs to the lows of the year, in which oil prices are currently situated.
With the oil prices below the 200-day MA, a negative divergence between several indicators in technical analysis, elections looming both in America and Israel, and weak economic data around the world, the most likely scenario would be a breakdown below $87.50. However, if escalations continue to rise in the Middle East, all bets are off and the oil prices will easily spike up through $100.00.
Technical analysis, at this point, shows that as oil prices are within the trading range, there’s a high probability that oil prices will remain in this area, as the massive swings from this year consolidate. I would keep my eye out for a breakout to either side of this trading range and pay attention to the geopolitical events occurring right now.