The US and Israeli strikes on Iran and Tehran’s response have propelled Brent prices to their highest level since the onset of the Russia-Ukraine conflict. How will the situation in the Middle East unfold? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Brent recorded its fastest rally since 2022.
- Oil prices will depend on the duration of the conflict.
- History does not provide any definitive answers.
- Long positions on Brent formed at $71.5 should be kept open.
Weekly Fundamental Forecast for Oil
Iran hoped that there would be no military conflict. The US allegedly found it disadvantageous due to the surge in inflation caused by rising oil prices. Moreover, Donald Trump’s tactic of making threats and then backing down was well known. However, this time the US took extreme measures.
The bombing of Iran by the US and Israel and Iran’s response in the form of missile launches across the region sent Brent crude prices soaring at their fastest pace in four years. The last time this happened was when Russian troops entered Ukraine, and markets feared supply disruptions due to Western sanctions.
Brent Crude Price
Source: Bloomberg.
When geopolitical shocks of this magnitude occur, two questions should always be asked. How long will the conflict last? How will it affect oil supplies?
History does not provide clear answers. The 2003 war in Iraq was the most bullish factor for Brent. In contrast, the 1973 Yom Kippur War caused its price to plummet.
Crude’s Reaction to Geopolitical Turmoil
Source: Bloomberg.
Most likely, Iran misjudged Donald Trump’s fear of high inflation. According to Evercore estimates, an increase in Brent to $80–85 per barrel will exert a negligible negative impact on the global economy and an even smaller one on the US economy. However, a price spike in Brent crude to $100–$120 per barrel would be a different story. In such a scenario, inflation expectations would rise.
Goldman Sachs estimates the risk premium at $18 per barrel, which is equivalent to 2.3 million bpd of global oil supply, not much compared to the closure of the Strait of Hormuz. Iran has not yet made any statements on this matter, but suppliers are already acting with increased caution. The longer the conflict lasts, the more problems there will be with supplies. Citi sees Brent rising to $120 per barrel in a shock scenario, while ING puts the figure at $140.
OPEC+’s attempts to stabilize the situation by increasing production by 206,000 barrels since April, which is 1.5 times more than in December, have not really affected the oil market.
Donald Trump is talking about two to three weeks, which will end either with Iran’s capitulation or a change of leadership to a US-friendly one. However, the US leader risks repeating the mistake of George Bush, who ended the Gulf War prematurely in 1990, requiring renewed intervention.
Weekly Trading Plan for Brent
There is little chance that Brent will return to $60 per barrel anytime soon. On the contrary, the longer the conflict lasts, the higher the chances of a continued rally to $84.5 and $90. As a result, long positions formed above $71.5 per barrel can be maintained.
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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