Middle East Tensions Could Give Oil Prices More Support

Oil prices could maintain their support levels this week as tensions between the United States and Iran continue to play out with U.S. Secretary of State Mike Pompeo saying that “significant” sanctions could be in store for Iran.

“The Middle East clashes should support oil prices at the start of the week as crude markets will wait to see Iran’s response to the threat of additional sanctions, ” said Edward Moya, senior market analyst at OANDA in New York.

An unmanned U.S. drone was shot down by Iran last week, which fanned the flames of growing tensions within the Middle East. However, U.S. President Donald Trump tamped down any ideas of waging war on Iran, calling off a retaliatory military strike.

U.S. intelligence was quick to identify Iran as the culprit of the attacks. According to video evidence, Iran’s Revolutionary Guard was shown removing an unexploded from one of the two oil tankers that were attacked.

“We’re prepared to negotiate with no preconditions,” Pompeo told reporters on Sunday. “They know precisely how to find us. I am confident that at the very moment they’re ready to truly engage with us we’ll be able to begin these conversations. I’m looking forward to that day.”

The heightened tensions caused oil prices to rise as Brent crude futures and West Texas Intermediate (WTI) crude oil were up just under 1 percent on Monday. Last week, Brent crude gained 5 percent while WTI jumped 10 percent, notching its biggest gain since December 2016.

Oil traders betting on more price increases can look to exchange-traded funds (ETFs) like the United States 3x Oil (NYSEArca: USOU), ProShares UltraPro 3x Crude Oil ETF (NYSEArca: OILU) and the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (NYSEArca: GUSH).

Supply cuts by the Organization of Petroleum Exporting Countries (OPEC) have pushed oil prices down, but downward forces from trade wars have also kept them in check. Oil prices rocketed higher last month following President Trump ending waivers on companies wishing to purchase Iranian oil without facing stiff sanctions. The companies affected most by these waivers were China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey.

Oil, however, faces a number of possible headwinds, but thus far, it’s been ignoring these risks.

“Oil & Gas bears may point to concerns stemming from the potential for a global recession, as Europe grapples with a slowdown and continues to deal with the uncertainties of Brexit,” a Direxion post noted. “During the Global Financial Crisis, the oil demand fell of the table in a relatively short period. Don’t forget that trade negotiations between the US and China still loom. If discussions break down, oil demand could drop not just because of less physical trade, but also because of possible broader negative impact on the global economy. Also, because oil is priced in US dollars, if the greenback continues to rise, it could put negative pressure on prices.”

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