Crude Eyes $75.50 Again as Iran Tensions Simmer, U.S. Strike Decision Looms

WTI Crude Oil Futures (August Futures)

Closing Price (No Official Settlement): 73.88, up +0.38 [+0.52%] 

Yesterday’s intraday chart is important to review (below), prices had rallied from Wednesday’s settlement – through the night session, and into the holiday trade. Prices fell around noon cst and news broke that Trump would make a decision on Iran strikes in two weeks. Markets had been preparing for the worst (strikes this weekend), or, the limited holiday volume couldn’t handle some smaller / active position squaring into the weekend. 

Iran-Israel is the key driver. Some sell-side research is getting clients fired up about $150 crude. This is possible, but a long shot. Spot WTI is undervalued against supply / demand regression models – and pretty decently undervalued when you start pricing out your risk-premia additions. 

Today, WTI Crude Oil is down -0.63 from yesterday’s early close

Headlines & Drivers:

• Iran “open to diplomacy & negotiations”
• This was followed by the launch of more missiles
• EIA data trending bullish
• Iran-Israel escalation
• Russia-Ukraine risk
• Post-Fed rotations and flows (Bank holiday yesterday)

Trying to get Iran to the table now will be difficult after Trump’s publicly announced double cross. It could happen, but it will require China or another national mediator for the talks to be taken in earnest by either side.

Iran is one of China’s most important strategic allies. On paper, 16% of China’s oil imports come from Iran (likely much higher in reality). China buys 90% of Iran’s oil exports. There is a decent probability that China will intervene in this conflict if the US chooses direct military engagement.  China does not want a US / Israel puppet regime on their doorstep, and they need Iran’s energy flows to support their economy / national security interests. If there is a time for China to challenge the hegemony on a global and symbolic scale, now is the time. No one is talking about this, but it’s a risk I’m considering in the back of my head.

Data Releases:

Wednesday’s EIA report followed Tuesday night’s API’s and showed an outsized draw in crude oil 

Estimates for today’s EIA report are as follows [thousand bbls]:

• Crude: -11,473 vs -2,500 estimate
• Gasoline: +209 vs +1,116 estimate 
• Distillates: +514 vs +1,000 estimate
• Refinery Utilization: -1.10% vs -0.50% estimate

Report Highlights:

• Crude production unchanged
• Jet Fuel production at all-time seasonal highs
• Rebound in gasoline demand
•  Import / Export Imbalance ran -1,700k bpd lower WoW, the biggest drop since mid-April

Technical Analysis:

August futures pierced our key, recent-high of 75.50 yesterday but failed to hold the level. Trump’s comments lead to a sell-off in the afternoon on light holiday trading. US flows will be very important here at 8:30.

The technicals are bullish, the fundamentals are trending bullish, and geopolitical risks are only growing. Fading this bull run may seem enticing, but you need a decent-sized catalyst to flip this momentum.

When the technicals, fundamentals, and market positioning all line up, it’s usually a good trade (in commodities). That’s where we are at with Crude. Momentum is likely to continue.

Fundamentally based pricing models (supply and demand vs historical price) still show that August WTI futures are underpriced, which doesn’t account for geopolitical risk premiums that need to be added (theoretically). I don’t like leaning on pricing models too much, but it’s a good note.

For intraday trading, our pivot and point of balance is set at….