Oil Price Fundamental Daily Forecast – Conflict in Iraq has to Escalate or Rally Will Stall

U.S. West Texas Intermediate and international-benchmark Brent crude oil rose on Monday as investors reacted to a possible hit to output due to an escalating conflict in Iraq. The news helped widen the spread between Brent and WTI crude oil.

December WTI Crude Oil settled at $52.14, up $0.41 or +0.79% and January Brent Crude Oil closed at $57.56, up $0.61 or +1.07%.

The current rally is being fueled by short-covering and speculation in reaction to the news that Iraqi forces on Sunday launched a campaign to retake control of the area surrounding Kirkuk. According to Reuters and Dow Jones, government troops took control of the North Oil Company, a military base and airport.

The crude oil contracts hit their highs for the day after Reuters reported Iraqi Kurdistan temporarily shut down 350,000 barrels a day of production at the Bai Hasan and Avana oil fields due to security concerns.

Forecast

Crude oil prices are trading mixed early Tuesday. WTI is trading lower, Brent is flat. This is further proof that the risk premium has returned to the oil market over the fighting in Iraq and rising U.S. Iran tensions.

The current price action suggests the market may be poised to move higher. Technical chart patterns show that prices have been rangebound for several months. This is because the OPEC-led supply cuts which have supported prices are being offset by rising U.S. output.

However, prices have started moving higher in October on expectations of increasing demand, especially from China, and some speculation that OPEC and other major producers may extend the output cuts until the end of 2018.

Prices could rise over the short-term because of rising risk, and over the intermediate-term because of a tightening market.

The events in Iraq are a very important development because unlike other military events in the Middle East, this one involves crude oil. Not only could supply be cut-off, but infrastructure is also at risk.

We’ve seen the initial spike in prices which is a normal reaction to the headlines, however, in order to extend the rally, the military activity has to escalate and supply has to be negatively affected.