Insights

Don’t fall for the growing oil crisis narrative yet

By Paul Reid

02 October 2024

iran oil.jpg

As tensions escalate between Israel and Iran, talks of supply disruptions are triggering sentiment shifts and market volatility, but what might really happen to USOIL prices in the coming weeks?

One of the oldest adages in trading is “buy the rumor, sell the news.” This approach or perspective suggests that prices often rise on speculation (or rumors) of a potential event but fall when the actual event comes and goes and the news is fully digested. Let’s break down the USOIL narrative forming right now.

The Rumor - Fear of a broader Middle East conflict has led to speculation about supply disruptions, driving oil prices up.

The News - As the conflict progresses and news confirms that oil supplies remain relatively unaffected, prices could fall back to previous levels, as the panic subsides and the market realizes the worst-case scenario has not materialized.

That’s one example of how investor sentiment alone can move markets without a real-world underlying mechanism or change. Those holding and refining crude oil prefer the prices to be high, but not too high, as it tends to trigger political tensions and even trade wars.

Unless recession fears are stalling energy assets, a common range where we don’t see price interference such as production cuts and other oil-defensive actions is between $65 and $85 (USD) per barrel. 

Whenever USOIL goes beyond that range, somebody somewhere reacts to return the balance. Whether it’s the US dipping into reserves or increasing fracking to bring down prices, or OPEC cutting production to raise prices, there’s always institutional intervention, and recognizing those imperatives and narratives is the nature of market insights.

Reality versus narrative

Despite the ongoing conflict, major global players like the US and China are incentivized to keep oil flowing, but how much oil are we talking about losing if Iran’s supply is completely disrupted? Let's see just how influential Iran’s barrels per day (bpd) contribution to global oil supplies really is.

  1. United States: ~12.8 million barrels per day (bpd) - (15.6% of global production)
  2. Saudi Arabia: ~11.1 million bpd - (13.6%)
  3. Russia: ~10.8 million bpd - (13.2%)
  4. Canada: ~5.8 million bpd (this likely includes non-crude oil liquids) - (7.1%)
  5. Iraq: ~4.5 million bpd - (5.5%)
  6. China: ~4.2 million bpd - (5.1%)
  7. UAE: ~4.0 million bpd - (4.9%)
  8. Iran: ~3.3 million bpd - (4.0%)
  9. Brazil: ~3.1 million bpd - (3.8%)
  10. Kuwait: ~3.0 million bpd - (3.7%)

Iran accounts for 4% of global oil production. Assuming that 100% of Iran’s oil production is disrupted, how bad might a shortage get? For this, we need to know if the remaining countries could pick up the slack. To gauge production capacity over actual production, we need only look at production cuts.

In October 2023, OPEC cut production by 2.2 million bpd, which was extended in June 2024. The massive cut is already set to gradually reduce throughout 2024/2025, but will likely get accelerated given recent events. Add to that, The United States, Brazil, Guyana, Norway, and Canada are already leading the charge in increased oil production, with a combined projected increase of roughly 1.1 million bpd in 2024.

While it’s probably a coincidence that the ending of a production cut and a production increase perfectly matches Irans’ oil output, it nevertheless confirms that the world’s addiction to petroleum is covered, with or without Iran, even if 100% of Iran’s oil is blocked. 

No need to panic, no need to raise prices. Whatever happens, the world will get its demands met, even if other producers must rally together to fill the gap. For now, there’s no reason to assume an oil shortage, which means there’s no reason for prices to react… from a mechanistic perspective.

Conclusion

As is often the case, sentiment is like a child reacting to a jump scare. There is a loud scream followed by the realization that everything is fine. After the initial shock, market prices, like the child’s heartbeat, returns to the normal range and life goes on. This happens all the time across multiple asset types, and it can be interesting to test it risk-free with the Exness demo account. The ability to test theories and strategies without risking your equity is deeply overlooked by many traders who already have an active trading account.

For traders watching the oil market closely, the “buy the rumor, sell the news” approach suggests that the recent price bump may already have factored in much of the fear surrounding the conflict. Now that this conflict is part of the ongoing news cycle, oil prices could be headed for stagnation and later a fall as the market calms.

Expect to see some sporadic volatility as the supply shortage narratives begin to saturate financial news channels fueling panic volume, but keep in mind coming production quotas that can easily counteract future supply issues. 

While sentiment these days is rarely grounded in facts or logic, it remains perhaps the most powerful influence over the markets today, and should not be ignored. Whenever a hype narrative appears in the media, anything can happen, and often does in the short term, so be sure to apply Stop Loss and possibly set pending hedge orders just for peace of mind.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid

Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.