Investing.com – Oil prices were basically directionless on Monday as the much-awaited U.S. sanctions on Iran began, prompting the question: Even if the market were to recover, will the rebound have legs?
Crude futures jumped in early trading, then pared much of their gains before finally closing mixed in the first session since the culmination of the five-month long oil embargo drama between the Trump administration and Iranian President Hassan Rouhani's government.
Oil prices surged almost 20 percent between May and October before giving back almost all of that in the past five weeks as speculation flew back and forth over the impact of the sanctions.
Going forth, the sustainability of any rally will depend on hard facts showing how the sanctions were affecting global oil supplies, along with other key data like weekly U.S. crude stockpiles, said Adam Sarhan, CEO and founder of New York-based global capital markets fund 50 Park Investments.
“When a market’s oversold, two concurrent things happen: One is short-covering, with people forced to buy back to cover their short positions. Two is emergence of the buy-the-dips crowd that buys as prices fall. So you get two simultaneous buying forces that can push prices up in very short order,” said Sarhan.
“The question, of course, is ‘Is this sustainable?’ Whatever you read on Iran and U.S. crude storage in coming days will determine that,” he added.
U.S. West Texas Intermediate (WTI) crude settled down 4 cents at $63.10 per barrel, after rising as much as $1 earlier in the session. It has lost about 18% since hitting four-year highs of nearly $77 in early October.
U.K. Brent crude, the international benchmark for oil, rose 34 cent to settle at $73.17 a barrel. That was 15% off its four-year highs above $86 hit last month.
Without imminent proof of market tightness from the sanctions, some think WTI will break below $60 a barrel and Brent under $70.
“If prices go very much higher from current levels, then new shorts will come in,” said Tariq Zahir, an oil bear who typically plays spreads of long-dated WTI futures.
Top Trump administration officials said they want to cut Tehran’s exports to zero in coming months and threaten to punish anyone caught violating the embargo. Iran’s crude exports used to average about 2 million barrels per day, and are down by about a third.
Despite its tough talk, Washington on Monday said it has given eight main buyers of Iranian crude -- China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey -- waivers to continue buying from Tehran until further notice. Top crude exporter, Saudi Arabia, has also pledged to maximize production while US shale oil output has hit record highs, prompting investors to expect a possible oil glut rather than a squeeze.
But Phil Flynn at Chicago’s Price Futures Group dismissed that notion, saying the correction in oil has been overdone: “While the market is still shocked that the Trump administration granted waivers, the market is still tight regardless. Spare oil production capacity and floating storage is near historic lows and demand is still buoyant.”