Energy Waffles as Iran Sanctions Draw Near


The S&P 500 bounced after last week’s sharp drop, but oil hasn’t been so lucky.

Crude oil futures (@CL) closed yesterday at their lowest level in a month. The weakness comes as news events turn potentially bearish for the commodity.

Government statistics on crude in storage, for example, have been higher than expected for five straight weeks. Meanwhile, the number of domestic rigs in production (1,063 according to Baker Hughes) has risen to its highest level since March 2015.

Crude oil futures (@CL) with selected indicators.

There are potential risks globally. China has not only shown weaker economic growth but also its refineries may be voluntarily boycotting U.S. crude. Meanwhile, Europe is struggling with Italian budget worries, Brexit uncertainty and tariff anxieties. Reuters has even reported that hedge funds are cutting long-oil positions after September’s sharp rally.

These developments emerge despite U.S. sanctions taking effect against Iran on November 4. For a while, that deadline lifted @CL because it would reduce oil supplies. But now traders may wonder if all the bullish news is priced in. A new picture could be taking hold, with sufficient inventories and weaker demand.

Equities related to crude have also struggled. The SPDR Energy ETF (XLE) is down almost 4 percent in the last week, making it the worst major sector fund by a wide margin over that time frame. It’s also forming a potential “bearish descending triangle,” a series of lower highs while holding support around $72. Does that suggest recent downward momentum will continue?

In conclusion, this isn’t a trade recommendation and everyone needs to do their own homework. But sentiment and price action may be turning more bearish toward crude oil and the broader energy sector.

SPDR Energy ETF (XLE) with potential bearish triangle.
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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.