Oil Stabilises After Mideast Tensions Ease

Crude oil soared last week due to concerns about conflict in the Middle East, but with no further escalation over the weekend, commodity markets may start to stabilise again.

Not Pricing in a War Just Yet

Last week, oil markets were rising due to concerns that Israel's actions against Iran-backed Hezbollah could lead to further escalation, disrupting oil supplies. Iran launched 180 cruise missiles at Israel in retaliation for killing the head of the group in Lebanon. Markets were anxious about Israel's response, as there were rumours Iran's oil fields could be targeted. US President Joe Biden discussed such a strategy, issuing a warning. Previous tit-for-tat strikes occurred at weekends, so markets breathed easier when Monday arrived without new conflict escalation.

Other factors naturally influenced crude oil prices. Strong US job data showed that the largest economy and crude consumer remained solid, outperforming expectations. API data days prior reported smaller-than-expected drawdowns, though year-to-date inventories fell 17 million barrels. Crude drifted lower on weaker global demand worries as OPEC+ curtailed supply to raise prices.

Oil Stocks, Oil Supplies, China Cuts

One year has passed since the attack by Hamas on Israel that sparked increased tensions, as Israeli Defence Forces push further into Lebanon to reduce Hezbollah's ability to launch missiles into northern Israel. The possibility of retaliation - which could involve Iran's oil fields - remains, leading analysts to speculate that Brent crude could rise above $100 per barrel. However, OPEC+ restricts around 5 million barrels per day through reductions, which could limit any increase if supplies remain constrained.

On Monday, oil prices tentatively decreased following implied volatility in the commodity, reaching its highest level since last year's attack. Markets are now considering data, such as whether China, the largest importer, will boost demand due to recent economic stimulus announcements or if its economy will continue underperforming. China had a week-long holiday, with its markets resuming trading on Tuesday, and markets await key forthcoming data that may show the potential impact of the stimulus plans. This leaves markets waiting to see if near-term risks are resolved, guiding a gradual normalisation of prices or if another geopolitical or economic surprise increases prices further.​

Brent Forms Double-Bottom Pattern

The price of Brent oil formed a double-bottom pattern after failing to fall below $70 per barrel in September and October, leaving support at the March low. If the price maintains a position above $75 and reclaims the $80 handle, the commodity may move towards resistance levels of $88 and $92 before potentially reaching the high of $96, seen last September.​

Source: SpreadEx / Brent Oil

Key Takeaways

Crude oil prices soared last week due to concerns about escalating tensions in the Middle East but stabilised over the weekend without further escalation. Markets are awaiting data from China and other major economies to gauge the impact on demand as OPEC+ restricts supply. Geopolitical risks and economic indicators will likely determine whether prices normalise or increase further in the near term.​