The closure of the Strait of Hormuz was expected to spell trouble for Brent bears. However, alternative supply routes, rising production, and weakening demand are preventing oil prices from reaching record highs. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The oil market deficit stands at around 5%, not 10%.
- The US continues to permit imports of Russian oil.
- Meeting Asian oil demand is becoming increasingly challenging.
- Brent trades can be considered once the price breaks out of the $91.5–$99.5 range.
Weekly Fundamental Forecast for Oil
According to the IEA, we are facing the most serious oil crisis in history! A record shortage in the oil market! Bloomberg echoes this sentiment. Nevertheless, after soaring to $120 per barrel, Brent has fallen and is trading below the $100 mark. Moreover, the decline may continue if Washington and Tehran manage to reach an agreement.
The closure of the Strait of Hormuz at the start of the war initially looked like a major disaster, disrupting around 20% of global oil and petroleum product flows. Qatar warned at the time that Brent could surge to $200 per barrel. Seven weeks later, Citi’s forecast that Brent could rise to $110 if the world’s main oil artery remains closed for another month no longer appears quite as extreme. Indeed, spot oil is trading above futures, but prices are no longer anywhere near the $100 level.
Brent Crude Oil Futures
Source: Bloomberg.
Commodity markets are cyclical: higher prices curb demand, eventually weighing on asset values. Brent appears to be following this pattern. Société Générale estimates that oil demand has already fallen by around 3%, while supply is increasing. Meanwhile, buyers are adapting by sourcing barrels stored on tankers. In this context, the US has extended the suspension of sanctions on Russian seaborne oil.
At the same time, the US is ramping up exports of energy products. According to Kpler, contracts for April and May point to shipments of 5.44 million bpd and 5.48 million bpd, respectively — both record highs. These levels are significantly above the 3.94 million bpd and 3.86 million bpd recorded in January and February.
When Saudi Arabia’s bypass routes are also considered, the oil market’s pragmatism becomes evident. The actual deficit appears to be closer to 5% than to 10%.
On the other hand, this situation is unlikely to persist indefinitely. The cumulative effects will become evident sooner or later. Demand from China and India remains strong, while seaborne oil stored on tankers is gradually being drawn down. At the same time, heightened tensions around the Strait of Hormuz are adding further pressure. The longer the market remains compressed, the more devastating the consequences are likely to be. The lack of an agreement between Washington and Tehran could therefore push Brent well above Citi’s $110-per-barrel forecast.
The US administration is well aware of this. Donald Trump is pursuing his preferred strategy—negotiating at gunpoint. He is unwilling to accept what he considers a bad deal, views any extension of the ceasefire as unlikely, and continues to threaten strikes on critical infrastructure, including bridges and power plants. Ultimately, the US leader may soften his stance under domestic and geopolitical pressure, but the key question is whether Iran is prepared to meet US demands.
Weekly Trading Plan for Brent
Until the results of the negotiations in Islamabad are announced, there is a high probability that Brent will consolidate within the range of $91.5–$99.5 per barrel. A break above the upper boundary will signal a buying opportunity, while a break below the lower boundary will present a selling opportunity.
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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