Oil Explodes Above $100 as Strait of Hormuz Shutdown Shocks Markets

***long term continuous 2nd line futures shown in chart above

Crude futures gapped higher on the Sunday open with May futures Crude futures opening at 98.00 and making highs at 119.48, +28.58 higher than Friday’s close. The U.S. & Israel’s failure to secure the Strait of Hormuz has surprised markets.

With the Strait closed, regional storage facilities have filled up quickly. This has required producers (Iraq, Kuwait, Saudi Arabia) to ease production. The slowing of production is preventative, as an all-out stoppage would make restarting more difficult. Regardless, these slowdowns will take a month or two to reverse if the conflict were to end tomorrow.

Satellite tracking has shown that Iranian oil tankers have been moving through the Strait, moving at least 11-12 million bbls since the onset of the conflict, while Western tankers remain sidelined. This is a pretty clear indication that the US does not have control of the Strait.

With crude at 100.00, macro dominoes start to tumble. Inflation figures rise, economic output falls, and recessionary pressures increase. All eyes and pressure globally are now on President Trump to rectify this situation quickly. The conflict is quickly reaching a precipice, where President Trump will have to choose between an extended conflict or an unfriendly and extremist regime.

We are likely to release barrels from the SPR, but it’s unclear what’s even in there at this point. A release could cause short-term relief and the reduction of speculative longs, but realistically, it’s like putting a band-aid on a torpedo hole.

Updated Technical:

Volatility is to remain amplified, and this market looks fragile in either direction. Headlines will cause sharp moves in either direction, despite their validity or truthfulness. Markets like this are dangerous trading environments, and risk management must be prioritized. It is likely that May futures will try to fill the gap at 88.16 (May basis), the issue is when.

Technically, the most important levels are today’s open (91.86) and the high (113.41) (May basis).

Spreads have skyrocketed, and the annualized “roll-yield” from buying deferred contracts back to December is at record levels. Roll pressure could cause more deferred contracts to outperform fronts, regardless of a short-term and partial solution to the Strait closure.

For resistance levels, we’re relying on weekly continuous charts, with the 106.84** level based upon pre-shale, 2014 levels. Do not rely on these levels with much confidence. In this environment, relying on technicals to guide your trading could prove disastrous.

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