EOG Resources: Trading Idea closing
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The war between the US and Iran that broke out at the end of February caused oil prices to skyrocket, reaching nearly $120 per barrel, which was followed yesterday by a significant correction after Donald Trump's statement attempting to calm the markets. Higher oil prices are favorable for oil companies that are less or not affected by geopolitical risks, so shares of EOG Resources, our trading idea published at the end of January, have also performed well in the recent period, reaching our previously set target price of over $134. However, the outcome of the war in the Middle East remains unclear. Statements from the Trump administration imply a relatively quick end to the conflict, but Iran clearly has a different opinion, and oil production in the region has declined for the time being. Taking all this into account, it may be worth realizing the return of over 17% achieved in just over a month, so we are closing our trading idea.
At the end of February, the United States and Israel attacked Iran, which erupted as a result of the dispute over the country's nuclear program. This, of course, was accompanied by a surge in oil prices, as Iran is one of the world's largest oil and gas producers (more than 3 million barrels of crude oil and 1.3 million barrels of other liquids per day). In addition, the Strait of Hormuz, the only maritime entrance to the Persian Gulf, is located next to the country, and a significant portion of the world's oil and LNG traffic passes through it on a daily basis (approximately 20% of global oil consumption and 20% of LNG trade; primarily Saudi oil and Qatari natural gas). Another interesting fact is that the majority of Iranian oil exports end up in China, which is estimated to have been around 1.4-1.6 million barrels per day before the war. Finally, it is worth mentioning that large quantities of fertilizers and other products related to industrial activities also pass through the Strait of Hormuz (e.g., urea, sulfur, phosphate, ammonia, etc.).
Basically, it can be said that neither the US nor China has any interest in a prolonged shutdown or significant disruption of oil and gas trade. In the former case, high oil prices are undesirable for the Trump administration, as important midterm elections are due in a few months (statements made yesterday in an attempt to calm the markets, implying a relatively quick resolution, reinforce this impression). The latter is a major importer of Iranian and other Middle Eastern oil and other products (China is the world's largest oil importer) and would obviously not welcome high prices either. The interests of the major powers are therefore not in line with a protracted conflict in the Middle East (with the possible exception of Russia, which is the relative winner in the current situation due to higher oil prices and easing sanctions).
On the other hand, a large part of the Iranian leadership, including Ayatollah Ali Khamenei, lost their lives in the attacks. This obviously complicates the rapid resolution of the situation, as ideally the negotiating partner would have to (credibly) guarantee, among other things, the shutdown of the nuclear program. However, the reality is for now, that the regional oil infrastructure has also been hit by several attacks in recent days, and Mojtaba Khamenei, the son of the former leader, has become the new Ayatollah, who may obviously have personal reasons for continuing the conflict.
For the time being, there is still a great deal of uncertainty surrounding the course of the war, and numerous factors could influence how things unfold. We have written about these in more detail here in recent days:
- The situation in Iran does not improve, what should investors do?
- A war has broken out, what should we do with our investments?
However, our trading idea for EOG Resources shares, published at the end of January, reached its previously set target level of over $134 yesterday thanks to the US-Iran war and soaring oil prices. Given the uncertainties outlined above, it may be worth realizing the return of over 17% achieved in just over a month, so we are closing our trading idea.
EOG Resources technical picture
The shares reached our target price (134.35) yesterday, so we close the long position opened at 112.5. After a significant rise, the stock may correct, even returning to around 118.75, but the upward trend may still remain. If it can stay above 125, this could be a good sign later on and could even take the stock to new highs.
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