eToro
By eToro
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News Burst – The price of oil shows a possible midterm decline

The price of crude oil might soon weaken as comments by President Trump, triggered by the forthcoming November midterm elections, and intervention by Russia and Saudi Arabia are expected to succeed in providing the necessary supply required.  With US midterm elections in November, price per gallon is a crucial barometer for Trump’s electoral support; it also keeps the likelihood of rising inflationary pressures on hold as well as Fed rate hikes in line with current market expectations.

The price of Crude oil recently surged to just under $73 a barrel as developments in Venezuela, Mexico, Angola and Iran contributed directly towards a decline in oil supply.  Trump’s tweet in April, accusing OPEC of artificially raising oil prices, has succeeded in instigating an attempt to contain the price appreciation amongst the major players. Hence, the forthcoming OPEC meeting in Vienna on 22nd June will be critical to agree on the next steps and the key players to lead are Saudi Arabia and Russia.

Saudi Arabia is benefitting from the rise in price as it helps rejuvenate the Kingdom’s finances and fund the costs of economic and social reforms taking place, yet it has to be supportive to Trump who agreed to pull out of the Iran nuclear deal.  Should OPEC not agree to provide the extra capacity, as a last resort Trump can tap into the US Strategic Petroleum Reserve which contains 660m barrels to help alleviate any short-term constraints.

Alongside the political environment which would prefer a contained or lower price of oil, similarly, the industry could withstand a further correction.  Following key restructurings across the industry, many oil producers are generating more free cash at current prices than they did at $100 per barrel before the market crash. This is partly due to the development costs being halved and operating expenses per barrel being down a third.

Finally, technicals also support a lower price as recent channels have been broken, opening room for a re-test of this year’s lows and potentially heading towards $55. The risk to our strategy is further unrest in the Middle East or an economic resurgence in the global economy.

The content is intended for educational purposes only, and shouldn’t be considered investment advice. Past performance is not an indication of future results. Your capital is at risk.

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