Crude Surges through Technical Restraints as Iran Seizes Control of Iraqi Oil Well

North American Commodity Update

Commodities - Energy

Crude Surges through Technical Restraints as Iran Seizes Control of Iraqi Oil Well

Crude Oil (LS NYMEX) -  $73.16  //  $0.51 //  0.70%

Though it would let up as the US session wore on; crude put in for an aggressive rally Friday as news that Iranian forces had taken control of an Iraqi oil well. The dispute began in the morning hours in the Middle East when Iranian military forces seized control, and according to the Iraqi border guard general Zafer Nazmi, positioned tanks around a well in the al-Fakah region. The immediate reaction to this news was violent as traders smelled the potential for an international incidence; but the slow progress of diplomacy as well as the approach of the weekend (not to mention pre-holiday) liquidity drain has tempered bullish expectations. Taking some of the heat off this event, boarder disputes between Iraq and Iran are not unusual. However, the young democracy in Iraq along with the ongoing international spat with Iran over its nuclear ambitions leverages the impact of this particular episode. Late in the US session, Iraq’s National Security Council said that its neighbor had violated its boarder and demanded the forces to “withdraw from well 4 and lower the Iranian flag from over the well tower immediately.” This can - and likely will - be defused quickly and without further trouble; but it should nonetheless be monitored carefully.

Outside of the leveraged speculative interests following the Iraqi oil well situation, the oil market was finding fundamental strength from the scheduled and exogenous factors. Temperatures have dropped well below normal for much of the US; and inclimate weather is forecasted to sweep through the eastern half of nation and hold there for approximately two weeks. This will help bolster expectations of demand for distillates and crude oil indirectly. Further supporting the outlook for consumption trends, macro economic data this morning revealed  sentiment among German business leaders hit its highest level since January of 2008. A heavy round of event risk is scheduled for release next week (despite it being truncated); and bearings on global growth and worldwide risk appetite can be reshaped. For speculative interests, traders will have to watch the weekly Department of Energy inventory figures following this past week’s 3.689 million barrel drop that pulled total supplies to its lowest level since the period ending January 9th. Reduced liquidity could very well leverage volatility – an explosive situation should there be a significant change. Other events worth marking are the OPEC meeting on the 22nd as well as the futures contract rollover on Monday.

Commodities - Metals

Gold Struggles to Reverse its Losses from Thursday

Spot Gold  -  $1,110.20  //  $11.30 //  1.03%

Gold advanced through Friday’s session; but progress would be limited compared to Thursday’s aggressive plunge. Underlying risk trends were primarily responsible for the commodities bearings as the metal followed the same path as equities as the day progressed. In the early European session, bullish interests had bolstered stock benchmarks; but selling pressure soon took over. Through the US session, risk appetite was relatively stable throughout the day. Looking ahead to next week, speculative interests will be leveraged for the commodity as liquidity form banks and other large capital pools is withdrawn for the holiday period. For background fundamentals, the market is looking at rising inflation and revived growth but little probability of near-term rate hikes. This, along with lingering speculation of central bank interest, is the primary bullish driver for gold heading into the end of the year. However, the most influential drivers for this market are the correlation to the dollar and trends in risk appetite. The greenback has taken to a meaningful advance that is looking less like a bounce and more like a true reversal by each day. At the same time, underlying risk appetite has yet to truly collapse. If there is a breakdown in key asset classes (like the Dow), it would likely further leverage the US currency and weigh on speculative positions behind this commodity.

Spot Silver  -  $17.26 //  $0.12 //  0.69%

Silver was little moved through the final 24 hours of the trading week. With holiday conditions expected through the rest of the year and other key risk-derived assets showing stability, there was little to rile silver to a meaningful move. Interestingly enough, the metal has formed a clear range base at $17 per ounce; marking a clear breaking point should bears swamp the market next week. Looking at the market flows behind price action, the one-week average of aggregate volume and open interest for the futures market have dropped to their lowest levels in three months.

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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com