Geopolitical Risk Elevates Crude To Four Month Highs

by on June 16, 2013 4:33 am BST

West Texas Intermediate (WTI) broke it’s range bound nature and was elevated to a four month high on growing geopolitical risk in the Middle East. On reports that the Syrian regime used sarin on a small scale against civilians, the Obama administration is now gearing up to arm the Syrian rebels with small arms. The civil war could breakout into a regional epidemic as Assad’s regime gains support from Russia, Hezbollah and Iran (OPEC’s sixth largest oil producer).

Obama’s deputy national security advisor, Ben Rhodes said the situation became rather urgent as Iran and Hezbollah have increased their involvement. Syria borders Iran and Iraq which accounts for a fifth of OPEC’s production. According to Tim Evans, Citi Futures Perspective energy analyst, “[oil is] padding the geopolitical risk premium given the U.S. decision to support the Syrian rebels, with the market fearing a broadening of the conflict rather than containment.”

While looking at a 2Y chart of crude futures, there has clearly been range range-bound trading. There had been a wider range that encompassed by the green and red dotted lines, and within this large range lays a shorter channel. Initially, I have been neutral on crude until this channel was broken in either direction. Since the price action broke and closed above former resistance, I have a slightly bullish view; however, this is depending upon the Fed meeting this week and the rumor of tapering. The dollar, and other assets, seem to be pricing in a modest taper by Fed Chairman Ben Bernanke, but it is still unclear whether this will happen. If there is no tamper, the dollar may pair back losses which may hinder crude’s progress. I am willing to place a 100.4 short-term target in regards to increasing geopolitical risk. After the data and tapper results, we may get a clear picture on black gold.

2Y Daily Chart of Crude Futures (/QM)

2Y Daily Chart of Crude Futures (/QM)