Trading oil in a geopolitically tense atmosphere
Oil gaps 10% higher on weekend oil attacks as geopolitical tensions show no signs of subsiding.

OIL – US CRUDE: Geopolitical tensions breathe new life into the pair’s price
Leave it to geopolitical tensions to breathe new life into the energy commodity’s price, with news that Saudi output has been cut in half following weekend attacks that while couldn’t be ruled out, took the market by surprise with a classic risk-off play this morning. Oil gapped 10% higher and made intraday highs unseen since May, safe haven products rose as investors fled to safety, and (non-energy related) equities started the week lower.
Supply side woes
As the Saudis race to resume oil production, it may take weeks to get back up to full output levels and would require countries tapping into energy reserves in the short to medium term, adding to already rising supply woes following last Friday’s Baker Hughes US oil rig count that showed yet another decline, from 738 to 733, and US inventories that have near consistently declined (the latest price moves will throw US shale a lifeline, but only on fresh production that isn’t hedged). But Saudi output being cut in half – even if temporarily – is on another level, representing 5% of total global oil output, and an even larger share of exports given Saudi Arabia represents 16% of that market.
However, the larger issue at stake is whether or not this will be the first of many, and whether any action/reaction at this stage in the Middle East would make oil installations a regular target should the Yemeni civil war continue or expand to include other oil-exporting countries as the US threatens to get involved. That is putting a risk premium on oil prices in general, as the market starts to take recent factors into consideration.
Technical overview and sentiment
With recent events, expectations are for its technical overview to remain volatile (to say the least), even as the bulk of its main technical indicators are neutral and combined with a trending ADX on the weekly chart. On the daily, the gap higher has put more positive technical bias in what was previously mostly range-bound movement.
In terms of sentiment, both retail and institutional traders were significant beneficiaries of the latest moves, with retail bias only 51% at the start of last week but rising to a heavy long 73% as range-trading shorts closed out towards the end of last week. Those heavy long traders were in luck this morning with a significant portion taking profit on longs. On the institutional side, the latest CoT report showed the bias amongst larger speculative traders rising 4% to an extreme long 84% on the back of an increase in longs by 18.6K lots and a simultaneous reduction in shorts by 25.4K lots and less likely to take profit on the recent gains given their usual long-term positioning tactics.

Trading strategies with increased volatility
With volatility expected to remain high on geopolitical tensions failing to subside, conformist technical overview strategies involve breakout strategies, whether buying the 1st Resistance at 62.21 or selling at the 1st Support level of 57.67 with a take profit of 2.27 and a stop loss of 1.13. Those looking to run contrarian strategies should consider it only after a significant reversal, by either buying the 1st Support level or selling the 1st Resistance after they have been broken first and entering on a reversal. Fading strategies in times of volatility (and this week in general is one of those on increased geopolitical risks and plenty of significant central bank announcements) are not recommended, given they will be most prone to being stopped out.
This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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