The market’s favorite commodity, crude oil, continues to trade in a choppy manner. The WTI brand started the week at $73.50, then sank to just over $68 two days ago, and is set to end the week around $70 per barrel. Brent through the levels of $75.75, $70.25, and $72.30, respectively.
As you can see, it is currently very difficult to predict what trend oil is going to stick to, and the tables keep turning each day. The reason why the situation is so complicated is that right now there are two different fundamental issues with opposite consequences battling for importance when it comes to crude oil prices.
First of all, there is the coronavirus pandemic. The spread of the delta variant around the world, most notably in the two largest economies - the United States and China, is causing concerns about new lockdowns and travel restrictions, which will both weigh on the demand for oil.
Every time the world has gone through a serious wave of coronavirus outbreaks, the demand for crude oil has gone down. Lower demand usually leads to lower prices, which is why oil was at some of its worst ever levels in 2020 and parts of 2021.
Due to the delta Covid-19 variant being more highly contagious and mounting evidence that the vaccines developed in 2020 only offer limited protection against the new mutation of the virus, the downside risks for oil right now are very real.
On the other hand, there are renewed geopolitical risks in the Middle East, which can cause oil supply to drop, inflating its price. Most of these issues concern Iran.
Iran is still under international sanctions and is not exporting oil in any significant amounts. It is in talks with the United States about a new nuclear deal that could lift those sanctions, which will also drive oil prices down, if an agreement is reached. But right now it doesn’t seem like a nuclear deal is anywhere close to completion because of political issues between Iran and the United States (plus its allies).
Most notably, Iran is suspected to be responsible for several tanker attacks recently. Pretty much any chaotic development in the Middle East right now is being linked back to Iran by intelligence from Israel, the United Kingdom, and the United States. The US is getting ready to respond to the attack on some of its own ships. Thus, a nuclear deal seems out of reach while the US and Iran are engaged in such hostilities.
In the meantime, Iran might continue to cause oil supply interruptions and to sabotage its oil-exporting neighbors, which causes short-term gaps in supply and spikes in oil prices.
