President Trump Thursday evening ordered a U.S. airstrike in Iraq that killed General Qassem Soleimani, Iran’s top general. Markets fell swiftly as investors weighed the risks of an escalating conflict between the U.S. and Iran.
Not surprisingly, one particular market was notably higher on the reports: oil.
Iran has promised retaliation for the strike - and with one of the largest oil reserves in the world and strategically important geographic positioning alongside the Strait of Hormuz, one of the most obvious threats comes from the energy markets.
Crude oil futures shot up more than 3% early in trading Friday.
The question now is whether the jump in oil prices is likely to be a short-lived blip on the radar or the start of a more long-lived trend higher.
To decipher the likely next move for oil prices, we’re turning to the charts for a technical look at the U.S. Oil Fund (USO) - Get Report, one of the most popular ways for investors to get exposure to moves in crude oil prices.
It’s been a choppy year for shares of USO. Like the crude prices this commodity pool tracks, the price action has experienced some wild swings thanks in large part to geopolitical risk in the Middle East.
From a technical standpoint, though, USO could be closing in on breakout territory after entering a resistance range this week. USO typically retreated from prices in the $13 to $13.40 range during the latter half of 2019, so if shares can manage to catch a bid above the upper end of that range, we’ve got a pretty clear indication that any overhead supply has been absorbed by the market and there’s room for more upside.
Shares are within striking distance of that key level following the airstrike in Iraq.
In the longer-term, we’re seeing a similar setup:
Oil prices retreated hard back in 2015, and they’ve slowly been establishing a shallow uptrend thanks to a series of higher lows that kicked off at the very start of 2016. The potential for a breakout here clears the way to the $16 level for USO.
That’s a 20% upside move for USO - expect similar scale moves in other oil instruments.
From there, a breakout through $16 in USO clears the way to meaningfully higher levels, but looking that far out is a bit premature. After all, USO failed its last two attempts above $16 in the last four years.
Still, we’re likely to see higher oil prices heading into the first half of 2020 at a minimum. Likewise, after barely keeping up with U.S. stocks for the last year or so, it looks like energy prices could start to outperform thanks to bullish technicals and higher geopolitical risk in the Middle East.
As a near-term speculation, or even just as an inflation hedge, now looks like as good a time as any to think about putting on a long oil position again.