The fundamentals behind the oil market continue to deteriorate. The supply shortage is growing, and prices are rising in response. Meanwhile, record-high diesel prices and Saudi Arabia’s shutdown of the East-West pipeline are fueling the Brent rally. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Record-high diesel prices are pushing Brent higher.
- Saudi Arabia has shut down a key pipeline.
- Donald Trump’s statements carry little weight.
- Long positions on Brent can be opened with targets of $114 and $118.
Weekly Fundamental Forecast for Brent
Throughout the Middle East conflict, rhetoric repeatedly diverged from reality. Brent’s return above $100 per barrel—and the threat of a continued rally—finally forced Donald Trump to break his long silence. The US leader said he believed Iran was eager to strike a deal and that Washington was open to discussing possible solutions. He also claimed that Russia and Ukraine had agreed to refrain from attacking each other’s energy infrastructure. However, is that really the case?
Before the conflict in the Middle East, Russia and Persian Gulf countries accounted for 45% of global diesel supplies. Today, export volumes from these regions are 1.6 million bpd lower than they were at the end of February. At the same time, diesel accounts for roughly 30% of global oil demand, so a surge in diesel prices to record highs is bound to affect Brent. In other words, diesel is adding fuel to the Brent crude rally, reducing the US president’s chances of winning the midterm elections.
Diesel Fuel Price Per Gallon
Source: Wall Street Journal.
The US president is increasingly forced to resort to rhetoric that runs counter to deteriorating market fundamentals as the conflict in the Middle East drags on. The International Energy Agency (IEA) has raised its estimate for the decline in global oil demand to 2.5 million bpd as the market adjusts to higher prices. However, projected supply losses have risen even more sharply, to 5.7 million bpd, making a return to balance by the end of the year increasingly unlikely. The resulting deficit is now estimated at 1.7 million bpd, up from 1.3 million bpd in the August forecast.
Global Oil Demand
Source: Bloomberg.
From a fundamental standpoint, the oil market is bullish, while the US administration’s rhetoric is having less influence than before as alternative supply routes bypassing the Strait of Hormuz come under increasing pressure. With its back against the wall, Iran is reportedly encouraging the Houthis to target Saudi Arabia’s oil infrastructure, adding to the risk premium and pushing Brent higher.
Riyadh has been forced to suspend operations on the Petroline, which carried roughly three-quarters of its 4 million bpd in exports in early September. The oil market’s direction will depend on how quickly the pipeline can be restored. The US Department of Energy expects a relatively swift restart, while the Associated Press, citing regional sources, reports that repairs could take several weeks.
Against this backdrop, Donald Trump’s statements carry little weight. Iran denies the US president’s claim that Tehran is eager to strike a deal, while neither Russia nor Ukraine has officially confirmed a halt to attacks on energy infrastructure.
Weekly Trading Plan for Brent
Brent has reached both bullish targets at $103 and $108. As a result, long positions can be considered with targets of $114 and $118.
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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