Crude oil is back at the forefront of traders’ screens after the turmoil this week in Iraq. Both front month West Texas Intermediate crude oil and Brent oil broke out to 6 month highs this week. Here is front month WTI oil:
The short-term breakout above the $105 level (green) leaves $110 (red) as the major resistance level on the upside from the past few years. The 50 day moving average has been moving higher since early February.
Traders have bid up crude oil options this week, but from a very low level compared to the past 2 years:
The tension in Iraq is likely to be a long-lasting affair based on the entrenched nature of the struggle there and the various factions involved. Against that, the oil market is already well supplied based on inventory levels, so if there is no disruption to oil flows (and simply the overhanging threat), then the fundamentals would suggest that the current bounce would not have legs.
However, part of the rally is most certainly the tail risk of a more significant cut to global supplies. With that in mind, whatever the direction of oil from here, I expect volatility to remain bid in the market, and is likely cheap even at current levels.