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I recently wrote about the sell-off in energy-related equities, 2 days before the vicious Hamas terror attack against Israel on October 7. The attack, and subsequent Israeli air strikes, caused WTI (Western Texas Intermediate) crude to rise to a short term high of 90 on October 19.Even though Israel is not a major gas or oil producer or exporter, Iran, the major patron of Hamas and Hezbollah and a major oil exporter, is. Iran is thought to be behind the Hamas attack, and they could be punished for it by increased sanctions or military action. Any military conflict with Iran could disrupt oil exports from the region, including Saudi Arabia and the Gulf states, which would be a significant hit to worldwide supply.Based on what we’ve just explained about the geopolitical situation triggered by the latest Hamas attack against Israel, it makes sense for crude prices to have spiked. The question now is, why has crude pulled back?
Possible Reasons for Pullback
Here are some possible reasons for the pullback in crude:
Middle East Cool Down
Since Israel has allowed humanitarian supplies into Gaza and Hamas has released a few hostages, some see that as hopeful to a peaceful resolution to the conflict, without an Israeli ground invasion of Gaza.
Weaker Demand
Prices are dropping due to the expectation for weaker demand as a result of the growing recessionary environment. The economic numbers coming out of China have been weak, and hopes of a China recovery have been a major factor in the thesis for higher demand.
Profit Taking
Traders are taking profits before the next move higher.
Analyzing the Reasons for Pullback
Middle East Cool Down
The idea theory that the Hamas-Israel conflict is cooling down and that the Israeli delay in mounting a ground invasion is a sign that there is room for peace is simply WRONG. Israel will invade Gaza to completely destroy Hamas. There’s a high probability that Hezbollah will attack Israel and start a second front. The fighting along the Israel-Lebanon is already escalating.
Iran is the main patron of Hamas and Hezbollah. As the conflict expands, the chances of them getting involved grow exponentially. They will need to be punished, either via sanctions or militarily — or both. While this is tragic for the world, it’s super bullish for oil.
Weaker Demand
Demand might be weakening but the consumer is still, for the most part, strong and employed. And winter is coming. And supply is still constrained. If China does begin to stimulate their economy, demand will climb, as will crude.
Profit Taking
Traders are in the business of making money. And the smart money traders who bought crude in the high 70’s and low 80’s had a nice 10-point gain to enjoy. Nothing wrong with that. Assuming that they agree with my thesis of crude going higher, they will want to buy back their contracts at a lower price. Based on the daily chart, a major support level for WTI is at the 83 level. If it holds there and start to bounce, there’s a good chance the smart money is back in and will ride crude up to 90 and beyond.
As of today (Oct. 25, 2023), WTI bounce at the 83 level and is currently pushing above 84.
How to Play Crude
The oil and gas equities have been lagging crude and primarily been following the S&P, which has sent the equities lower even as crude has gone higher. So even though I think the equities, like COP, CVX, EOG, SLB, will move higher along with crude, their move will probably be tempered by S&P, if the index drops.The purest way to play crude is with WTI futures. But if futures is not your game, you can trade the ETF USO, which tracks the WTI futures contract.
Bottom Line
My best guess is that the situation in the Middle East will get much hotter very soon, which will drive crude much higher. Buying the USO ETF is a good way to bet on this rise in WTI.More By This Author:Energy Stocks Are Selling Off Hard. Should You Buy Or Sell?
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