Oil prices and the equity markets have been trading on the defensive since the beginning of October with many geopolitical issues generating price volatility. Issues related to the Iran regime have been generating chaos on both the oil and equity markets. The US pulled out of the Iranian nuclear deal in February of 2018, pushing oil prices up to $80 for Brent and $76 for WTI, ahead of the November deadline. This was countered by the Trump administration providing exceptions to nearly every country it trades with to continue to purchase Iranian oil for the next 6-months on an as needed basis.
Volatility in Oil Will Whipsaw Equities in 2019
There is more volatility than meets the eye in the oil patch according to an iFOREX review. The extreme drop in oil prices took out the premium the markets put in following the Trump administrations withdrawal from the Iran Nuclear Agreement. A 29% drop in crude oil prices in less than 6-weeks generated significant volatility in the equity markets. The decline not only effects oil producers and refiners but is also affecting high yield bonds. Many oil companies borrow in the debt market and high oil prices allows them to pump a record 11.7-million barrels a day. The market will not be willing to continue to fund that much oil if prices are in their mid-50’s compared to the mid-70’s. This can create a negative credit cycle, where investors pull their money out of the capital markets, if oil prices remain depressed.
Iran Versus Saudi Arabia
One of the Issues that Iran creates is its issues with Saudi Arabia. The two countries are at odds. Since Iran supports terrorism, its an enemy of the United States, which has led to a partnership between the US and Saudi Arabia. In the aftermath of the murder of journalist Jamal Khashoggi, the CIA has claimed that Saudi Crown Prince Mohammed bin Salman was directly involved. President Donald Trump has now sided with Saudi Crown Prince Mohammed bin Salman and refuted the CIA’s claim based on the assertion that relations with a critical ally should not be derailed.
Trump also claimed that if he did not side with MBS, that oil prices would skyrocket, and he was trying to avoid this scenario. Despite clambering from the US congress, it appears that the U.S. won’t impose further punitive actions against the kingdom over the murder. In a statement released by the White House Mr. Trump said that “It could very well be that the Crown Prince had knowledge of this tragic event, maybe he did and maybe he didn’t!”
As we look forward to 2019, issue related to Iran will continue to affect the markets. Oil prices will be the direct beneficiary of the volatility which could lead to further whipsaw movements in equities. In 6-months the Trump administration will need to make an assessment and determine if they can continue to provide wavers for Iranian oil consumers. Trumps hope is that oil prices are in the 40’s or 50’s and will only jump into the 70’s if the administration removes the wavers. If prices are in the 70’s they will likely jump to the 90’s which will be a drain on gasoline consumers.