West Texas Crude Oil (NYSE: USO) rose by nearly 4% following the U.S. attack on Iran's top military commander. Oil has been a laggard for most of the past year, but it's set up to outperform in 2020 especially with this latest catalyst. If tensions between the two countries continue to escalate, $80 is a reasonable target.
Oil Lagging in 2019
While 2019 was a spectacular year for financial assets, most physical commodities lagged until the final three months of the year. This period saw favorable conditions for commodities with rising interest rates, dovish monetary policy, and hints of an acceleration in economic growth. As a result, many precious metals and industrial metals finished the year at or near their 52-week highs.
One meaningful exception was oil which finished the year at $63 about 5% under its May highs. Some reasons for the weakness in oil included slowing industrial production which dented oil demand and increasing supply. Notably, oil failed to rally despite tensions increasing in the Middle East throughout the year. Another factor in oil staying depressed was the looming Saudi Aramco IPO which resulted in increasing production all year to ensure a successful public debut.
U.S.-Iran Relations
President Trump walked away from the Iran nuclear deal and placed strict sanctions on the country. In turn, the sanctions have wrecked the country's economy, increased leverage of political reformists, and emboldened the ruling regime to step up its proxy war against US interests. These included the attacks on the US embassy in Baghdad and Saudi Aramco refining facility.
President Trump retaliated with the targeted strike on the second most powerful man in Iran, General Qaseem Soleimani. Many are expecting some sort of retaliation and the odds of a full-blown war between the country have risen.
Oil Breakout
In this scenario, oil prices would certainly climb to $80 and even more. Iran is surrounded by adversaries like Saudi Arabia and Israel, and its military doesn't stand a chance against a U.S.-led alliance. However, one of its most effective leverage and deterrent points is its ability to play havoc with energy markets and the global economy by disrupting energy production and transportation.
For most of the past year, oil traded in a range between $52.5 and $65. In a way, it was consolidating the more than 50% gain from late December to early May. This consolidation period now creates a powerful breakout potential and a low-risk stop point for traders and investors.