Oil Prices Supported by Supply Concerns Despite Dollar Strength

Markets appear to be taking a respite from Middle East tensions, but crude oil prices remain elevated due to supply concerns.

A Momentary Relief, For Now

Prior to the weekend, crude prices rose to 6-month highs based on expectations around Iran's retaliation against Israel for the bombing of one of its consulates in Syria. However, most of the missiles launched against Israel were intercepted, and Iran insisted its actions were "over". While Israel has not ruled out a reprisal, analysts believe the incident will follow the same pattern as in 2020 when tensions peaked following the death of Qasem Soleimani, which also saw tensions escalate briefly with an Iranian missile launch targeting a US military base after which the situation normalised.

While this incident and the associated spike in oil prices appear to be settling down, overall uncertainty has kept fuelling investors' interest in oil stocks. Concerns beyond Middle East tensions include depleting international stockpiles as OPEC maintains constrained production. Demand is expected to rise, with solid growth in the US and China reporting Q1 GDP above expectations. This has led some analysts to suggest oil prices remain around $95 per barrel this year.

Solid Summer Outpaces Strong Dollar

Crude oil prices have remained elevated despite the dollar's strength being driven by higher yields, suggesting the buoyancy of crude oil may be even stronger and could remain supported when the Fed moves to cut rates later in the year. Heading into the peak US summer driving season, during which demand typically increases, US gasoline prices are already high owing to refinery outages lowering inventories and higher international fuel costs.

The shortfall in supply meeting heightened demand could be a theme for the year as electrification of the car market in the US stalls, leading major suppliers to cut jobs due to a lack of demand for electric vehicle charging. Later today, the API will publish the results of its inventory survey, which can be seen as predictive of what the EIA will report tomorrow. However, recently, the weekly fluctuations in crude stockpiles have been largely overshadowed by geopolitics.​

May Contract Points to Above $90

Crude oil May futures have stabilised around $85 per barrel, representing a correction after failing to break above the double-top at $87.50 in recent sessions. The potential for an increase above $90 remains, provided that an inverse head and shoulders pattern forms. With the head at $68 and the neckline around $79, the measured move projection brings 90.50 in focus and could retest 2023 highs at $92.5. Loss of the support zone around $84 would not negate this bullish unless and until the neckline level is breached to the downside. This would require successive supports at $83 and $81 to hold to maintain upward momentum and avoid deeper pullbacks for the commodity.​

Source: SpreadEx / Light Crude, May

Key Takeaways

Markets appear to be taking a respite from Middle East tensions for now. However, crude oil prices remain elevated owing to ongoing supply concerns and strong demand expectations. While the recent missile launches by Iran against Israel have de-escalated following interceptions, uncertainty persists regarding the geopolitical situation and global stockpile levels. Demand is predicted to rise further during peak summer driving season in the US, with analysts suggesting crude prices may remain around $95 per barrel this year due to tight supply and demand fundamentals outpacing currency fluctuations.​