Here is Why Oil Prices Could be Even More Volatile Ahead

A bumpier ride ahead is expected for the ever-volatile oil prices , given the United State's impending sanctions on Iran, upcoming new emission standards by the shipping regulatory body that are applicable worldwide and a significant drop in U.S. commercial crude oil inventories.

While a supply disruption due to the ongoing geopolitical tensions in the Middle East could push crude oil prices higher, the ongoing U.S.-China trade war and a stronger U.S. dollar threaten to drag oil prices down.

Since oil is denominated in U.S. dollar, lessor affordability of weaker-currency countries will reduce demand and consequently price. Moreover, the trade war will weaken the economy of China, reducing the demand from the largest importer of crude oil in the world.

Brent crude, the global benchmark for oil, closed at $75.82 on Aug 24 after U.S. crude oil inventory data was published in the federal government's Energy Information Administration (EIA) report. However, the commodity remained volatile since the beginning of this month. While Brent crude oil grew for five days in a row beginning Aug 15, it moved down to close at $74.73 on Aug 23, following the second round of tariffs imposed by the United States and China on each other's goods.

Here are the key factors that might influence oil prices in the future:

U.S. Sanctions on Iranian Oil to Push Prices Higher

U.S. sanctions on Iran's oil, which will take effect on Nov 5, are bound to tighten oil supplies and sway crude oil prices. The United States pulled out of the 2015 Iran nuclear deal in May and has imposed sanctions on the latter in an effort to negotiate a fresh nuclear agreement with the Islamic Republic.

The earlier sanctions that came into effect in the second week of August were aimed at the country's currency and crucial industries. But the upcoming oil sanctions are vital, as revenues generated from oil exports is Iran's major income and the lifeline for that country's economic activity.

The United States has warned other nations to stop importing Iranian oil by Nov 4 or face sanctions. While French oil giant Total has stopped importing Iran's crude, fearing Washington's penalties, China remained firm on its oil trade with the Islamic nation.

Iran is the third-largest exporter ($40.1 billion in 2017) of crude oil in the Middle East, after Saudi Arabia and Iraq. The nation accounted for 4.8% of the world's total crude oil exports last year.

Insufficient U.S. Crude Oil Inventories to Lift Oil Prices

U.S. crude oil inventory data has been largely volatile for the past two weeks, as stockpiles decreased by 5.8 million barrels for the week ended Aug 17 after a rise of 6.8 million barrels from the week ended Aug 10. Crude oil stockpiles were 408.4 million barrels as of Aug 17, according to a report released by the EIA.

The sharp drop of 5.8 million barrels versus analysts' expectation of a 1.5 million barrel decline drove oil prices higher. If crude oil inventories fail to move up for the week ended Aug 24, oil prices could move further up.

Shares of energy companies Ecopetrol S.A. EC and Eclipse Resources Corporation ECR have gained 6.9% and 7.7%, respectively, in the past one month. Both the companies sport a Zacks Rank #1 (Strong Buy).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

U.S. China Trade War Tensions Could Drag Oil Prices Down

The trade war that commenced between the world's two largest economies since July took another ugly turn on Aug 23, when both slapped a second round of penalties on $16 billion worth of each other's goods. A total of $50 billion worth of products are now under the tariff fire.

After the second round of tariffs was implemented on Thursday, crude oil prices took a plunge despite the bullish trend induced by falling U.S. crude oil inventories. Two-day long trade talks between the two countries were concluded on Aug 23, with no breakthrough and no respite to the prevailing trade issues. If the trade war scenario worsens, oil prices may decline.

IMO Restrictions on Sulfur-Rich Fuel Oil to Drive Oil Prices Up

The International Maritime Organization's (IMO) new emission standards, which will come into effect on Jan 1, 2020, is a major concern for shipping industries. IMO's goal is to significantly reduce the pollution emitted by ships. Restrictions on the sulfur content in fuel oil will require new measures to be implemented by the global shipping industry, which is something it is not ready for.

According to a Morgan Stanley analyst, demand for middle distillates (crude oil) could go up in order to curb the pollution emitted by ships, driving demand for crude oil. This could act as a catalyst to boost Brent oil prices, which could reach $90 a barrel in 2020.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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