Crude Prices Bounce Back on Strength of Iran Fears and Weakened US Dollar

Traders think a surprise build in crude inventories isn't such a big deal after all. File Image / Pixabay

With concern over the possible reimposition of sanctions against Iran by the U.S. as a now-constant source of support and the U.S. dollar falling after the Federal Reserve left its benchmark interest rate unchanged, West Texas Intermediate on Wednesday settled up 68 cents to $67.93 per barrel, and Brent climbed 22 cents to $73.35.

Also said to be a factor in Wednesday's trading was a more sober reassessment of earlier news of surprise inventory builds.

As if to suggest every imaginable permutation of what might happen between the U.S. and Iran has already been expressed ad nauseum by pundits in recent weeks, Michael Lynch, president of Strategic Energy & Economic Research, conceded that oil prices are reflecting "concern about the Iranian sanctions" and that "Most of the comments we are likely to hear for the next week or so are going to be very bullish for prices - lots of grumbling and grandstanding."

For the record, U.S. president Donald Trump will make his decision whether or not to scrap the Iranian nuclear deal on or before May 12.

Meanwhile, as Iran is reportedly selling as much of its oil as it can to clients (to the tune of 2.6 million barrels per day in April, according to the SHANA news agency), Citi warned in a note to investors of the risk that prices could slump because too many traders are betting on renewed sanctions.

It stated, "If the geopolitical tension subsides or results in a smaller supply disruption than currently priced in, we are likely to see a sharp pull-back in investor positioning and an even sharper correction in oil prices than the $5 or so that might be warranted even as macro uncertainties persist."

As for the Energy Information Administration's earlier news that crude stockpiles rose by 6.2 million barrels in the week, previously jittery traders are now taking solace in the fact that 5 million barrels of that build was concentrated on the U.S. west coast.

Phil Flynn, an analyst at Price Futures Group, explained, "Sometimes the west coast numbers are erratic and usually when you get a big build in the west coast, it's followed with a big draw the next week."

If anything can be gleaned from the diversity of analytical opinion expressed this week so far, it is that trader behaviour has reached the point where it is almost impossible to state with any certainty that the market is headed towards bullish or bearish waters.

For his part, Brian Gilvary, chief financial officer for BP, thinks oil prices have risen to unsustainable levels: earlier this week he said, "Sometimes people forget that actually it was not that long ago we were down at $28 per barrel...I think oil prices today feel a bit frothy."