The escalation of the conflict in the Middle East has given Donald Trump an opportunity to declare that it’s all over. The deal is canceled, and everything is back to square one. Judging by the rally in Brent, that seems to be the case. However, are investors being led up the garden path? Let’s discuss this and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US is ready to withdraw from the deal with Iran.
- The oil market turned bullish again.
- China continues to stabilize the market.
- Long positions on Brent can be considered with targets of $82.5 and $84.5.
Weekly Fundamental Forecast for Oil
Don’t count your chickens before they hatch. In recent weeks, the markets have lived with the sense that the worst of the conflict in the Middle East was behind them. Brent quickly returned to pre-war levels, and Macquarie and Citigroup predicted that prices would fall to $60 per barrel in the coming months. Iran’s attacks on tankers in the Strait of Hormuz, followed by the US response, appeared at first glance to be a black swan event. In reality, it was entirely predictable. The positions of the two sides were simply too far apart.
The main drivers behind Brent’s drop to February lows were record US exports—which allowed Europe and Asia to meet demand for the next 2–3 months—a reduction in global reserves to their lowest level since December 1990, and a sharp decline in Chinese imports. Against this backdrop, the resumption of traffic through the Strait of Hormuz resulted in oil shipments that proved unnecessary.
OECD Government Oil Stocks
Source: Bloomberg.
Adding to the bearish pressure are OPEC+ plans to raise production by 180,000 bpd, Iran’s rapid increase in exports, and the swift recovery of output in Gulf states. As a result, even 30–60 tankers passing through the world’s key oil chokepoint were enough to fuel concerns about a potential supply surplus. According to Vortexa, oil flows through the Strait of Hormuz before the escalation reached 40% of pre-conflict levels.
Interestingly, China has once again increased its oil purchases. While some have described Beijing as a savior of the global economy, its actions are largely driven by market conditions: China tends to buy more when Brent prices decline and scale back imports when prices rise.
Chinese Oil Imports
Source: Bloomberg.
In general, given the reluctance of OECD countries to quickly rebuild their stockpiles prior to Iran’s attacks on tankers in the Strait of Hormuz, Brent crude was indeed closer to $60 than to $80 per barrel. The escalation of the conflict in the Middle East changed everything. The oil market quickly shifted from contango to backwardation, where more distant contracts are cheaper than those for immediate delivery. This indicates either strong demand or supply constraints. Clearly, the latter is the case.
Donald Trump’s words that it’s all over and he doesn’t want to deal with Iran suggest that investors can expect more intense hostilities than before unless the US leader changes his mind.
Weekly Trading Plan for Brent
Brent‘s rebound from the lower boundary of the $70–80 range signaled profit-taking on short positions and triggered a reversal. A further escalation of the conflict in the Middle East would provide grounds for increasing long positions with targets of $82.5 and $84.5. Alternatively, if the US and Iran return to the negotiating table, Brent crude will likely remain stuck in this consolidation range.
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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Source: Original Article
