What’s next for the crude oil price after the escalation in Middle Eastern geopolitical tensions?

Geopolitical tensions escalate

Crude oil prices have climbed further this morning, trading at $70.96 (+1.66%) as Middle Eastern tensions threaten to escalate.

Following Israel's latest military operations against Iranian proxies, Iran launched around 200 missiles at Israeli targets overnight, most of which were intercepted. No casualties have been reported, likely due to prior warnings. In response, Israel has vowed to retaliate.

Speculation and market impact

While some speculated that Israel might strike Iranian oil fields, this seems unlikely. Such an action could push oil prices towards $80.00, which would upset Israel’s allies working to control inflation. Instead, Israel is more likely to target critical weapons factories and military installations, similar to actions taken in April.

In the aftermath, there is hope for a return to the shadow conflict that has been ongoing between Israel and Iran’s regional proxies since the 7 October Hamas attack.

What’s next for crude oil prices?

If the conflict around Israel escalates into direct confrontation with Iran, aside from the severe humanitarian impact, there's a risk that Iranian oil (4% of global supply) could be cut off by embargos or military actions. The potential loss of Iranian supply might be offset by the return of Libyan oil and increased Saudi production, as voluntary supply cuts are set to expire on 1 December.

Historically, during Middle Eastern crises over the past three decades, crude oil prices have seen short-term spikes but eventually realigned with broader supply and demand dynamics. For example, after an initial surge from $82.79 to $89.85 following the 7 October Hamas attack, crude prices remain 20% below the 20 October high despite this week's gains.

Demand outlook

While recent events raise supply concerns, demand expectations remain subdued. It’s uncertain whether China’s recent dovish policy shift will significantly boost fuel demand, given its ongoing efforts to electrify and decarbonise its transport sector.

Crude oil technical analysis

Crude oil sliced through the 200-day moving average ($78.00) in mid-August and then dropped below the next support level at $72.50, hitting a 15-month low of $65.27 in early September.

If crude oil can rally above its overnight spike high of $71.94 and reclaim resistance at around $72.50, it could move towards the 200-day moving average at $77.50. However, upside potential remains limited until crude oil breaks above $72.50.

Crude oil daily chart

• _{Source: TradingView. The figures stated are as of 2 October 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}