Oil News: Futures Rally as Outlook Splits on Iran Risk and Rising Crude Inventory

Crude Oil Rallies to $61.83: Speculators Bet on Iran While Supply Reality Shows Different Story

Light crude oil futures are higher on Wednesday after hitting their highest level since September 30 earlier in the session at $61.83. The market is in a critical area on the daily chart because after clearing two important moving averages and a series of swing tops, there isn’t much chart resistance to stop it until $64.75.

At 15:08 GMT, March WTI Crude Oil is trading $61.50, up $0.57 or +0.94%.

Technical Breakout Clears Path, But Fundamentals Tell Different Tale

With all of the short-term technical resistance wiped out this week either by short-covering or new speculative buying, all traders have to do now is sit back and wait for the news to play out. Short-sellers took their positions on real data showing a worldwide glut. New longs are betting on potential Iranian supply disruptions.

API Data Shows Significant Inventory Builds Amid Rally

However, the supply picture tells a different story. Late Tuesday, the American Petroleum Institute (API)reported significant builds in U.S. crude and products. Crude stocks in the U.S., the world’s biggest oil consumer, rose by 5.23 million barrels in the week ended January 9, the API reported. Gasoline inventories climbed 8.23 million barrels, while distillate inventories rose 4.34 million barrels from a week earlier, Reuters reported. The rally may have been curbed by this news, but it really didn’t stop speculative buyers watching the events unfold in Iran on TV from underpinning prices.

Venezuelan Supply Returns as U.S. Embargo Reverses

Another potential event that could stall the rally is the news that OPEC member Venezuela has begun reversing oil production cuts made under a U.S. embargo as crude exports were also resuming, three sources told Reuters.

According to reports, two supertankers carrying about 1.8 million barrels each of crude are headed to the United States. These are likely the first shipments of a 50-million-barrel deal between Venezuela and the U.S.

That is one side of the equation, the potentially bearish side. In other words, oil is moving and there is no supply disruption.

Iran Remains Wild Card, But Disruption Risk Unclear

The other side, or the speculative side, is that the turmoil in Iran will escalate to the point of reaching the oil-producing areas of the country. However, unless attacked from outside the country, I can’t foresee protesters causing any major disruptions, especially since the Iranian government is using violence on the streets of major cities. I can’t imagine how vigorously they would defend their oil production, which is essentially their whole economy.

If the U.S. does take military action and oil production is disrupted, then the game changes since it’s possible that the amount of oil lost offsets the Venezuelan oil hitting the market in the near-term. Recent data shows Iran produces about 3.2 to 3.5 million barrels per day. So in about a month the Venezuelan oil benefit will be wiped out.

The Big Question: How Long Can Hope Outweigh Reality?

Looking ahead, it’s still a speculator’s game and the question is: do they have enough money to continue to prop up the market, or will bigger money come in to stop the rally and reestablish bearish positions? In other words, how long can a rally based on something that hasn’t happened yet last when faced with the reality of ample supply?

More Information in our Economic Calendar.