Iran’s chokehold on Gulf oil exports is loosening. As a result, the country has lost a key negotiating advantage in talks with the US. At the same time, the US embargo increases the risk of further escalation in the region. How could these developments affect the oil market? Let’s examine the key risks and develop a trading plan for Brent crude.
The article covers the following subjects:
Major Takeaways
- Oil exports from the Middle East are recovering.
- Iran has been backed into a corner and may escalate the conflict.
- Demand for oil from US strategic reserves is low.
- Short positions on Brent can be opened with targets of $93 and $88.
Weekly Fundamental Forecast for Brent
The oil market never stops surprising. When the US and Israel began bombing Iran in late February, Brent did not soar to record highs, even though the closure of the Strait of Hormuz and a 20% reduction in global supply seemed like a doomsday scenario. Brent returned to pre-war levels even before the peace agreement between Washington and Tehran was signed this summer. Finally, oil prices are now showing no signs of falling amid the resumption of oil exports from the Middle East.
Oil Exports from Gulf Countries
Source: Bloomberg.
According to Kpler, average oil shipments from Saudi Arabia, the UAE, Qatar, Bahrain, Kuwait, Oman, and Iraq totaled 16.3 million bpd in September, or more than 80% of the 12-month average before the conflict began in the Middle East. JP Morgan estimates that shipments reached 17.5 million bpd over the past five days, representing more than 89% of pre-war levels. Goldman Sachs estimates that flows have fully recovered to pre-war levels, including shipments moved through clandestine channels, putting the figure at 23.3 million bpd.
If oil supplies have nearly returned to normal, why isn’t Brent crude plummeting? This is particularly notable given that the release of the final 40 million barrels from the previously announced 172 million barrels of US strategic reserves was met with relatively weak demand of just 500,000 barrels.
One possible explanation is the market’s concern over a potential escalation of the conflict involving Iran. The US military blockade of Iranian oil exports is putting significant pressure on the country’s budget and economy. Tehran now faces two broad options: enter negotiations or resume attacks on energy infrastructure across the region. The latter scenario could carry significant implications for oil supply and prices.
Brent Front-Month Spread
Source: Bloomberg.
This was also reflected in the widening spread between the November and October futures contracts, from $1–2 to around $7 per barrel. The market appeared skeptical that the recovery in Middle Eastern oil exports seen in September would continue. In other words, futures pricing suggested growing concern about a potential escalation of the conflict.
The spread subsequently narrowed, and Brent prices declined as concerns about supply disruptions gave way to a more optimistic outlook. However, a further surge in oil prices could be constrained by the slow recovery in refined-product exports. Refined-product prices have risen sharply, which, in turn, is supporting demand for crude oil.
Exports of Refined Products from Middle East
Source: Bloomberg.
Weekly Trading Plan for Brent
Iran has lost significant leverage after losing control of oil exports from the Middle East. From the oil market’s perspective, the worst-case scenario may have been avoided. Any further escalation of the conflict could prove temporary, suggesting that rallies in Brent may present opportunities to consider short positions with targets of $93 and $88.
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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