Crude oil price analysis: will the Brent and WTI gains hold?

Crude oil prices have rallied further to one-month highs amid heightened fears over the escalation of conflicts in the Middle East. On Friday, Brent, the benchmark for global oil, recorded gains for the sixth consecutive session; rallying to a level last seen on 30th August at $78.68. Similarly, WTI oil was up for the fourth consecutive session to a one-month high of $74.75 as at the time of writing.

While OPEC+ has a healthy spare capacity, concerns over a full-blown war between Iran and Israel remain high. Traders are concerns that the probable hit on Iranian oil facilities and disruptions at the Strait of Hormuz would be beyond OPEC’s ability to compensate. 

Geopolitical tensions

WTI, the benchmark for US oil, rose by over 10% between Tuesday and early Friday; hitting a one-month high on Thursday at $73.99. As at the time of writing, it was trading close to the one-month high as  geopolitical tensions in the Middle East remain a key bullish factor.

The latest catalyst that pushed crude oil prices higher is President Biden’s utterances on the ongoing war. On Tuesday, Iran launched close to 200 ballistic missiles on Israel. This follows the killing of Hassan Nasrallah, the Hezbollah group leader, and an Iranian commander in Lebanon. There are no reported fatalities from Iran’s attack as most of the missiles were intercepted by US and Israeli defense forces.

The latest events have heightened fears over a possible Israeli attack on Iran’s energy facilities including its oil production, export, and refinery infrastructure. When asked if the US would support such a strike, President Biden on Thursday stated, “We’re discussing that. I think that would be a little – anyway.” At the same time, Israel’s Prime Minister Benjamin Netanyahu stated that Iran had made a big mistake and it would pay for it. Iran has also threatened a crushing response should Israel retaliate.

An attack on Iranian oil facilities or the imposing of tight sanctions against the country would see the curtailing of upto 3% of the global supply which equates to 3.2 million barrels per day. While these fears have boosted crude oil prices in recent sessions, the risk premium is limited by OPEC+ ability to compensate the probable loss of Iranian supply. 

In recent years, the alliance of oil producing countries has been cutting production in an effort to support global prices. As such, it has amassed millions of barrels in spare capacity. More specifically, the group has 5.86 million bpd in spare capacity with analysts estimating that Saudi Arabia and the UAE are able to increase production by 3 million and 1.4 million bpd respectively.

In addition to OPEC’s healthy spare capacity, an increase in US production has further alleviated the fear premium in the global crude oil market. The US produces about 13% of the global crude oil compared to OPEC and OPEC+ share of 25% and 40% respectively. 

Since late 2022, global crude oil prices have largely been trading between $70 and 90% despite the Russia-Ukraine war and tensions in the Middle East. However, an escalation of the war between Israel and Iran would inevitably push oil prices to and past the psychological level of $100 per barrel. In particular, traders are concerned over probable supply disruptions in the Strait of Hormuz.

The Strait of Hormuz is the world’s most crucial chokepoint as large oil volumes flow through it. It is strategically located between Iran and Oman; connecting the Persian Gulf with the Rabain Sea and Gulf of Oman. In fact, according to the US Energy Information Administration (EIA), about a fifth of the global oil output flows through it daily. It links crude oil producers in the Middle East, including Iran, Saudi Arabia, Iraq, the UAE, and Kuwait, to major global markets.

Crude oil forecast

The daily chart shows that the Brent crude oil price dropped to a low of $68.70 on September 10, and then staged a solid comeback to almost $80. 

It has bounced back, rising above the key resistance points at $72 and $72.40, the lowest points in May 2023 and December 13 last year. 

Brent has also crossed the 50-day moving average, while the Relative Strength Index (RSI) and the MACD indicators have pointed upwards. 

It has also flipped the important resistance point at $75.87, its highest swing on September 24th. 

Therefore, Brent will likely continue rising as investors wait for Israel’s response to the recent bombing campaign by Iran. It may rebound to $80 and then resume the downward trend if the response is not all that forceful.

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