Oil rallied over 3% in early trade on Thursday, hitting a fresh three week high of $55.86, as markets react to rising tensions in the Middle East and the Fed standing ready to offer more stimulus to the US economy.

Today’s gains have put oil up over 5% so far this week and 3.8% up on the month to date. Following May’s decline of 16% could oil have further to climb?

Reports of a US military drone being shot down by Iranian missile in international air space over the Strait of Hormuz demonstrates the elevated level of tensions around that key oil route. This comes following suspected Iranian attacks on two tankers earlier in the month amid ongoing US sanctions on Iran.

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Whilst tensions in the middle east have caused the spike in oil prices today and earlier in the month, there are several other factors supporting oil.

US -Sino Trade & the Fed

Signs that the US and China, the two largest consumers of oil, are resuming talks lowers the probability of a prolonged trade war hitting demand. Meanwhile the Fed preparing to offer stimulus to the US economy has not only weakened the dollar making oil cheaper for holders of other currencies but would greatly help the demand side of the oil equation too.

OPEC Meeting

After weeks of wrangling, OPEC have finally agreed on a date to meet; 1st July with OPEC plus group meeting July 2nd. Saudi Arabia have bee making it clear that they are keen to keep the output production cuts of 1.2 million barrels a day in place, possibly even limiting production further. Momentum for an agreement seems to be building amid growing reports from energy ministers that an extension is “logical and reasonable”.

Stockpile data

US Crude stocks declined by more than expected last week, a draw of 3.3 million barrels, well below the 1.1 million expected after stockpiles had swelled to almost 2 year highs.

For now, oil traders will remain glued to developments in the middle east for signs off further escalation of tensions. US macro data will also be closely watched for its impact on the dollar.

Crude oil levels to watch:

Crude has broken out of the channel which has been trading in this month. Crude bulls will be eyeing resistance at $56.20 prior to $57.15 on its way to $59.00. On the downside, resistance turned support $54.85 offers near term support. A break below this level would see oil re-enter its familiar channel. The next support level is seen at $53.30.

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