Following last week’s tensions between the United States and Irak, traders who were optimistic enough to bet on a major crude oil price surge ended up losing significant amounts.
On Friday, Brent crude prices registered a 5% weekly decline, closing at $64.98 per barrel, which is below the initial levels, before United States’ airstrike over Iran, that took out general Qassem Soleimani, on January 3.
Things weren’t different for Domestic West Texas intermediate either, as it also posted a weekly decline of over 6%, reaching $59.04 per barrel, the biggest weekly drop since July 2019.
It all started with a spike…
What’s interesting is that last week, when several concerns regarding Iran retaliating with a hit to Middle East oil infrastructure has all the initial momentary spikes reversed. However, a quick reversal in price action can be considered premature, says energy trader and founder of The Energy World, Dan Dicker.
“I think that traders ultimately may get bit in the backside because there’s such passivity to geopolitical risk,” he declared for Yahoo Finance.
“I was biting my fingernails – maybe a lot of people were – that, you know, in fact, if there were casualties from the reprisal strike from the Iranians that Trump might, you know, puff his chest out and toss a bomb at Tehran and we’d be in the middle of, you know, a sector-wide war that involved more than just the U.S. and Iran.”
On Wednesday, President Donald Trump announced that he is seriously considering retaliating against Iran instead of escalating a military confrontation. And this had an immediate effect, easing the tensions between the two countries, but also sending oil prices down.
Crudes, the biggest risk/bet of the moment
This entire situation basically confirmed that during this period, crude oil traders can be considered momentum seekers, as prices are quickly responding to geopolitical shocks.
“Instead of humans playing the market, there really are machines playing the market,” Dicker admitted.
“And yes, we’ve all had to become used to that, because those traders who have been playing the game as if it were, you know, 2010 or 2000 or 1995 have gotten their heads handed to them.”
A lot of economists claimed that the earlier price spikes, registered this week, capped due to a perception that a supply shock in the Middle East would do less regarding hampering oil supply, considering that there is already a supply glut, while the domestic production is surging.”
As a side note, this entire situation resembles last September’s moment, when Brent crude oil prices registered a 15% spike, then went down again, following a drone strike the United States blamed on Irak, which hit Saudi oil infrastructure and blocked 5% of global daily oil production temporary.