IRAN and the United States Oil Fund LP (ETF) (NYSEARCA:USO)

There are multiple forces working against OIL at this time and as a result the ETFs that trade Crude Oil have fallen aggressively in recent days.  The declines are eye-opening and real, but are they sustainable and rationale?

ETF Declines over 2 weeks:

The issues:

  • Greece
  • China
  • Iran

Although I hardly believe Greece is itself a major influence on OIL demand and production it certainly disrupts the global political climate and currencies, and although the EURP itself has been firmer w/re to the USD than other currencies, the relative strength of the dollar has shifted the mindset of OIL traders to the sell/short side. 

That was the beginning...

Next, China's market action was being watched, in institutional circles everyone was talking about the 'short China' trade, and we all were very aware of the economic issues over there as those relate to growth expectations, but the fear that seemed to exist on a Governmental level in China this past weekend has left many investors concerned that China is going to stall.  If that happens the demand for Oil that everyone has been presuming may also be put off for a little while.

Lastly, IRAN's stockpile of oil is being held at bay, no pun intended, prevented from being sold by political sanctions that relate to its nuclear power initiatives.  On Tuesday (today) negotiators were working to reach a deadline that could allow the stockpiles to be sold into the open market.  Some estimates suggest that 40 million barrels could hit the market soon after negotiators reach a deal.

These three issues are all important, but when it comes down to it oil is a supply and demand commodity, and the main focus of the industry has been on supply, so it is the last of these three issues, IRAN, that carries the most weight. 

Reasonably, IRAN will not flood the market all at once, but it certainly will start to sell if the sanctions are lifted, and additional supply is the last thing oil investors want to hear. 

That is the reason oil is off so much.

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