Crude oil is perhaps the most ubiquitous commodity as it is the energy that powers the world. The price of crude oil depends on a myriad of factors. The state of the global economy is one of the primary drivers of the demand for the energy commodity. However, with over half the world’s reserves in the Middle East, oil prices can move with political turbulence in the region.
Crude oil was trading at over $100 per barrel in June 2014 when increased shale production from the United States caused the price to fall. As the international oil cartel decided to flood the market with oil to make U.S.output uneconomic, they shot themselves in the foot. In February 2016 the price of crude plunged to lows of $26.05 per barrel.
OPEC reversed course in 2016 and cut production, and the price rose to the $50 per barrel level by the end of the year. In 2017, the energy commodity traded in a range from $42.05 in July to highs of just over $60 per barrel at the end of 2017. In late November of 2017, OPEC extended their output quota until the end of 2018. A combination of OPEC production cuts and economic growth around the world lifted the price of WTI crude oil to above the $60 level for the first time since 2015.
As the weekly chart illustrates, the price of crude oil has been trending higher since the February 2016 low. Technical resistance stood at $62.58 the May 2015 high when WTI crude oil was on its way lower. The technical level was the last resistance that separated the energy commodity from the steep slope of the bearish price action that gripped the market in 2014. On January 9, crude oil rose above the technical level.
At the start of 2018, the price of crude oil is at the highest price in twenty months. Global economic growth has increased the demand for energy and the growing tension in the Middle East has increased the probability that hostilities could break out in the region.
Any violence that impacts production, refining, or logistical routes in the Middle East could cause price shocks in the oil market and send the price of nearby crude oil soaring in the months ahead. In December, Iranian-backed rebels fired two missiles into Saudi territory. The Saudis called the action an act of war. Moreover, a blockade of Qatar by the Saudis and their allies in the Gulf States is another challenge to Iran. Domestically, the Iranians have their hands full with protests. The Middle East is a tinderbox, and the price of oil is likely to be the best barometer for tension in the region in the weeks and months ahead.
We are likely to see an increase in volatility in the oil market making trading oil the optimal approach. Crude oil is now above its critical technical resistance level which is a sign that more price volatility is on the way.