Fears of an escalation in the Middle East, combined with record-high tanker shipping costs through the Strait of Hormuz, are keeping Brent crude prices elevated. China is also shaping the oil market outlook. Let’s examine the factors driving oil prices and develop a trading strategy for Brent.
The article covers the following subjects:
Major Takeaways
- Oil shipments from the Middle East are resuming.
- Escalating geopolitical tensions are pushing Brent prices higher.
- Rising exports of petroleum products are helping contain prices.
- Brent is currently trading within the $97.5–$108.5 range, creating opportunities for range-bound trading strategies.
Weekly Fundamental Forecast for Brent
While fear and greed pull the stock market in opposite directions, they reinforce each other in the oil market. Fears of an escalation in the conflict involving Iran have outweighed the recovery in Middle Eastern oil exports. Meanwhile, tanker owners’ efforts to capitalize on elevated shipping costs have provided additional support for Brent prices. Combined with China’s rising oil imports, these factors help explain why Brent continues to resist downward pressure.
Middle East Exports of Crude and Petroleum Products
Source: Reuters.
According to Reuters, crude oil and condensate shipments from the Middle East reached 18.1 million bpd in September, compared with 18.2 million bpd in the eight weeks before the conflict began in February. JPMorgan’s research puts exports at 17.5 million bpd, equivalent to 99% of pre-war levels. At first glance, the logic seems straightforward: if falling exports drove Brent prices higher, a supply recovery should push them lower. However, the picture is more complicated.
With its back against the wall, Iran escalated the conflict by attacking tankers in the Strait of Hormuz, while the Houthis intensified their attacks on Saudi Arabia. These developments increased the geopolitical risk premium, and oil exports from the region began to decline again in October. Meanwhile, persistent security risks have kept tanker shipping costs near record highs, further supporting Brent prices.
Traffic of Oil Tankers Heading to China
Source: Bloomberg.
The rally is also being fueled by the return of oil tanker traffic bound for China to pre-war levels. China’s sharp reduction in oil imports helped prevent Brent from reaching record highs at the height of the Middle East conflict. If Chinese purchases increase further, oil prices could revisit those peaks.
Meanwhile, difficulties in restoring petroleum product supplies to their February levels are adding fuel to the Brent rally. As prices climb, refineries are increasingly eager to secure crude supplies. Against this backdrop, Donald Trump is seeking to curb soaring diesel prices by striking a deal with Russia to supply 2.25 million barrels to the global market. By comparison, the US typically exports around 1.5 million bpd. BNP Paribas believes China could also increase its supplies, potentially by more than Russia.
A rise in petroleum product exports could ease some of the pressure on the oil market. However, Iran shows little sign of backing away from escalation, while tanker owners have little incentive to relinquish the record risk premiums they are charging. As a result, the forces supporting Brent prices remain firmly in place.
Weekly Trading Plan for Brent
Under these conditions, Brent may face consolidation. The $97.5–$108.5 range appears to be a reasonable trading channel for now, although its boundaries may need to be adjusted as market conditions evolve. A range-bound strategy could involve selling near the upper boundary and buying on pullbacks toward the lower boundary.
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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