This is Why Investors Should Not Trust the Oil Rally

For the first time in history, oil prices went negative.

All thanks to a severe lack of demand, and far too much supply.  Not even OPEC’s production cut of 10 million barrels a day could stop the decline.

However, we are seeing a slight recovery in oil.  We just have to question how long it can last.  After all, until the coronavirus threat is over, we still won’t see much demand.  On top of that, there’s still far too much supply with no room to store it.

At the same time, OPEC may be hinting at further cuts.

“Majid bin Abdullah Al-Qasabi pointed out that the Cabinet discussed the Kingdom’s keenness to achieve stability in the oil market, its affirmation with the Russian Federation of a firm commitment to implement agreed targeted cuts over the next two years, their continuing monitoring of oil market situations closely, and being prepared to take further measures jointly with OPEC+ and other producers,” as highlighted by Oil Price.

Unfortunately, as we’ve seen with OPEC in recent weeks, action is too little, too late.

Threats to Iran Driving Oil Higher

At the same time, oil is running higher on Iranian threats from President Trump. 

“I have instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea,” he tweeted.  

This threat comes just days after Iranian vessels were operating very close to U.S. ships in the Persian Gulf.  Iran fired back, with The Hill noting, “Iran’s Islamic Revolutionary Guards Corps (IRGC) acknowledged the encounter on Sunday but claimed without evidence that American forces triggered the incident, accusing the U.S. of ‘unprofessional and provocative actions.’”

While it’s a wait and see at this point, it won’t be enough to keep oil prices higher.

Unfortunately, transportation of all forms is set to plunge, says Forbes, as millions of Americans work from home, and are unlikely to take vacations until the virus threat is gone.  On top of that, oil travel demand has dropped considerably.  “According to the U.S. Transportation Security Administration, passenger screenings at airports have dropped by roughly 95% in the month of April, compared to early March,” they note.

In short, while oil may be rising today on OPEC hopes, and threats to Iran, oil could fall more.