Crude oil has strengthened sharply this week, with prices for the commodity rising on Monday and Tuesday. Looking at trading this morning, crude oil prices are taking a breather. Yesterday, Iraqi forces captured Kirkuk (a major city in Iraq's Kurdish region) in a military operation launched at midnight. Facilities captured include the Kirkuk airport, the K1 military base and oil fields in the outskirts of the city. Iraq has now recaptured oil and military targets that the Kurds had captured from ISIS earlier. For now, there appears to be limited resistance to Iraq's military operations in the region. As the region contains 10% of Iraq's total oil reserves, the risk of a civil war has the potential to limit crude oil supply. As such, the military conflict is bullish for crude oil prices.
WTI remains above $50, and is currently trading just above $51.80. Brent crude is currently above $57.90. After entering overbought conditions two weeks ago, crude oil is now trading within a normal range.
Looking at US crude oil stocks, last week EIA figures showed falling crude oil stocks and rising gasoline inventories. While crude oil inventories fell slightly more than expected (2.7m vs. 2.4m barrels expected), gasoline stocks surged (2.5m vs. 0 expected). US crude inventories have been falling as a significant portion of Gulf Coast refiners remain offline thanks to Hurricane Harvey. Looking at reactions in markets, crude oil prices fell following the EIA report, which also showed growing US oil exports.
After a strong performance in the second week of October, we are now bullish on crude oil in the medium-term. Crude stocks continue to fall around the world, helping the 'rebalancing' narrative. Furthermore, the recent the seizure of Kurdish oil assets near Kirkuk and Trump's refusal to certify the Iran deal are increasing expectations of lower future supply. Looking at various technical indicators on the weekly chart, crude oil is looking neither overbought nor oversold, but remains within normal trading conditions.