The North Sea benchmark rises on signs of escalating conflict in the Middle East, but prices quickly move lower in response to conciliatory rhetoric from the US. This market reaction is a good sign for Brent bears. Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Brent is swinging between escalation and de-escalation.
- Market losses are estimated at 14 million bpd.
- Oil’s future depends on US-Iran talks.
- A breakout above $103 and $106 is a reason to buy Brent.
Weekly Fundamental Forecast for Oil
The oil market has been extremely turbulent lately. Iran periodically attacks energy infrastructure in the Persian Gulf and US vessels, while the US responds strike for strike and Israel continues to target Hezbollah positions in Lebanon. However, the White House insists that the ceasefire remains in effect and that Operation Epic Fury has concluded. Investors are urged not to believe their eyes, but to trust official statements. However, uncertainty remains elevated, causing investors to reduce their exposure to black gold, as reflected in the decline in open interest.
Open Interest in Oil Futures
Source: Bloomberg.
One way to understand where the market is likely to move is to observe its reaction. The scale of Brent‘s decline on conciliatory rhetoric from the White House appears larger than the rallies triggered by outbreaks of hostilities in the Middle East. According to the IEA, the market reaction remains relatively contained, which is quite unusual amid 14 million bpd of supply disruptions.
To balance the market under such conditions, several factors are required: weaker global demand, higher supply outside the Gulf region, alternative routes bypassing the Strait of Hormuz, and large onshore inventories.
According to Citi, the oil market has a substantial buffer of 700-800 million barrels accumulated over the previous 12 months. At the same time, US exports of oil and petroleum products are hitting record highs, while China’s oil imports have fallen from 11.7 million bpd before the conflict in the Middle East to 8.2 million bpd, suggesting softer global demand.
China’s Oil Import Trends
Source: Bloomberg.
Thus, the situation turned out to be less severe than initially feared. After the US and Israel launched strikes on Iran, many forecasts pointed to Brent rising to $150 per barrel. Some analysts in Qatar even suggested that oil could reach $200 per barrel. By May, however, the oil market had largely adapted to the new reality and had begun pricing in the possibility of a peace deal between Washington and Tehran.
Investors remain optimistic, believing that the armed conflict has already peaked. That period roughly coincided with record highs in the spread between spot and futures oil prices. These premiums have now returned to pre-war levels.
Oil Contract Premium Trends
Source: Bloomberg.
In reality, no one knows what will happen tomorrow. Investors should consider binary scenarios for the black gold market.
Weekly Trading Plan for Brent
If US-Iran talks take place and prove successful, Brent may decline toward $84 and $76 per barrel. Conversely, if the parties fail to reach a deal, a breakout above the $103 and $106 resistance levels will signal a buying 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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