Until Iran appointed a new Supreme Leader, markets believed the Middle East conflict would remain short-lived. However, by the end of March, global oil production could fall by 10 million barrels per day. Let’s examine the situation and outline a trading plan for Brent.
The article covers the following subjects:
Major Takeaways
- Global oil production is falling rapidly.
- Brent has climbed above $100 for the first time since the summer of 2022.
- Neither the US nor Iran appears willing to step back.
- Buying Brent with targets at $125 and $130 remains relevant.
Weekly Fundamental Forecast for Oil
The day investors feared is approaching. Oil has surged above $100 per barrel for the first time in four years, and this may only be the beginning. The real shock could come as oil producers in the Persian Gulf start cutting output. Iraq, Kuwait, and the United Arab Emirates have already announced production cuts. According to JP Morgan, if the Middle East conflict continues for another week, daily production in the region could fall by 4 million barrels per day. If the conflict lasts until the end of March, the decline could reach 10 million barrels per day, equivalent to about 10% of global supply.
Oil Production in Major Producing Countries
Source: NordeaMarkets
Just weeks ago, the closure of the Strait of Hormuz, through which 15–20% of global oil shipments pass, seemed almost impossible. Now it has become a reality. As a result, producers are running out of storage capacity and have started cutting production. Iraq reacted first. Output dropped from 4.3 million barrels per day before the US-Israel-Iran conflict to about 1.7–1.8 million barrels per day.
Kuwait and the UAE soon followed. Qatar added to market fears by warning that Brent could surge to $150 per barrel. After Mojtaba Khamenei, the son of Ali Khamenei, was appointed Supreme Leader, such a scenario no longer looks unrealistic. He lost not only his father but also his mother, wife, and son during the bombings. Under these circumstances, any compromise with the US now appears unlikely.
Before the leadership change in Iran, oil prices lagged behind the trajectory seen in 2022 at the start of the war in Ukraine. Markets held on to the hope that the current confrontation would be intense but short-lived. However, Donald Trump’s intention to push Iran toward complete capitulation, along with his statement that markets must endure short-term pain in the form of $100 WTI, suggests the conflict has reached a deadlock.
Oil Performance During the Conflicts in Ukraine and Iran
Source: Nordea Markets.
Investors are gradually abandoning the illusion that the confrontation will end quickly, yet the worst may still lie ahead. Slowing global growth and accelerating inflation are creating a clear stagflation scenario.
Oil and US energy companies are the obvious beneficiaries of the Middle East conflict. Brent has surged 38% in a week. OCBC Group expects prices to reach $140 per barrel, while Kpler sees a potential range of $130–150.
Weekly Trading Plan for Brent
Long positions in Brent opened at $71.5 proved to be a strong decision, as did adding to longs as oil prices moved higher. Brent may continue rising toward $125 and $130 per barrel. The recommendation is to buy.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of UKBRENT in real time mode
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