What's Driving Oil?

One of the questions that commodity traders constantly ask themselves, is the often imponderable one of ‘what is driving the price’, and for oil at present, this is a tricky one to answer. If we start with the fundamental picture, the price of oil has certainly reflected the tensions in Syria, first spiking higher as tension mounted on the expectation of military intervention, before sliding lower over the last few weeks, as the crisis eased. The catalyst for oil in the region, is not so much the direct impact on Syria, but in the reaction by its near neighbors, and in particular Iran and the key supply chain of the Straits of Hormuz.

Any action here by Iran, as a result of military intervention, would see oil prices soar in the event of a closure of this narrow waterway, offering as it does the only access point to the Persian Gulf, and as such is the busiest in the world for oil tankers. On average around 18% of world oil consumption passes through this narrow point, every day, and any closure or threat of closure would see crude oil prices soar higher, well beyond the $110 per barrel area.

Inventories
Moving to more ‘local’ fundamental data, yesterday’s crude oil inventories, did little to provide any upwards momentum for the commodity, defying market expectations coming in with a build in inventories of 2.6M bbls against a market forecast of a draw of -1.0M bbls. As a result, December crude oil futures closed the session lower at $102.05 per barrel.

From a technical perspective, the shooting star candle of August 28 was the defining price point over the last few weeks, sending a clear signal of weakness at this level, and duly reinforced by further failures at the $108 per barrel level, which is now a key area of price resistance. The associated volume picture also remains weak for any short term bullish momentum to be sustained, and over the last two weeks, it is interesting to note that as oil prices have fallen so volumes have been rising, a clear signal of further weakness in the short term.

However, note the volume on September 24 – well above average coupled with a small doji candle, suggesting that this may be the first sign of buyers entering the market on the expectation of military action, and taking positions ahead of the event. Yesterday’s price action was similar, and again, resulting in a narrow spread down candle, but with high volume, suggesting buying at this level once again. So far in today’s oil trading session, the commodity has moved marginally higher to trade at $102.39 at time of writing.

Support
Below, the market is now rapidly approached a deep area of potential price support at the psychological $100 per barrel region, and provided this holds, then this may provide the platform required inject some bullish momentum.

In summary then, and to go back to the initial question, there is no doubt that the fundamental picture is likely to dictate oil prices, particularly on any intervention and consequent reaction from Iran. Syria aside, supply problems in Libya have helped to keep oil prices high, and with demand in China and elsewhere remaining strong, the supply demand equation is working to drive prices ever higher. The technical picture also suggests that this is the market’s expectation, with support regions and volume both sending similar signals of a chart that is preparing to reverse higher from the recent bearish trend, and move back into the deep congestions zones now clearly defined on the volume at price histogram on the left hand side of the chart. But for any sustained move higher, this will require solid and rising volume, and the catalyst here may well be the prospect of military intervention in Syria. The circle is squared once again!