Oil (WTI) breaks out as Middle East escalation raises supply concerns
Oil prices are rising for a third straight day after the most significant attacks by the U.S. and Iran in weeks, escalating the conflict in the Middle East and increasing the risk premium on crude.
The U.S. attacked Iranian air defence and communication systems, while Iran launched missiles and drones against U.S. positions in Jordan, Iraq and Bahrain. Two Saudi tankers were also hit by projectiles in the Strait of Hormuz this week.
The escalation has renewed concerns over a prolonged disruption to oil flows through the Strait. Kepler data showed only four commodity vessels crossed the Strait on Tuesday, compared with a 10-day average of 13. Shipping through Bab el-Mandeb has also fallen, adding to the supply disruption.
Market shrugs off Venezuela oil deal
Earlier this week, Trump announced an oil agreement with Venezuela under which Venezuelan crude would be used to replenish U.S. strategic reserves, currently at their lowest level in 44 years.
While this agreement could strengthen U.S. energy security over the longer term, it doesn’t address the immediate supply constraints currently supporting prices. For now, the market is focused on barrels reaching the market, rather than barrels that could come to the market at a point to the future.
On the demand side, the picture is softer, with weaker U.S. and Chinese economic data pointing to some moderation in consumption. However, demand has so far remained relatively resilient despite higher prices.
Supply concerns drive the oil price
Supply is the clear driver of the oil market. Unless tensions in the Middle East ease, particularly around the Strait of Hormuz, it is difficult to see what would trigger a significant decline in crude prices in the near term.
Oil prices would need a sense of progress toward a diplomatic solution in the Middle East, or the reopening of the Strait of Hormuz, to decline.
Rising oil prices lift global bond yields
It is also worth noting that the renewed oil rally is having broader market consequences, adding to inflationary pressures and lifting global bond yields.
European bond yields have risen to the highest level in 15 years, while the 10-year Treasury yield is at the highest level since January last year. The 10-year Japanese government bond yield also pushed above 3% for the first time in three decades.
Tightening financial conditions have triggered selling across risk assets, with Asian markets under pressure and U.S. futures pointing to a weaker start after yesterday's losses.
Oil technical analysis
Oil has broken out of its symmetrical triangle pattern, rising to $90 a barrel. The price trades above its 50- and 200-day EMAs, keeping the outlook constructive.
Supported by the RSI above 50 and the breakout, buyers will look to extend gains towards $95, the 38.2% Fibonacci retracement of the $55–$120 move. Above here, $100 comes into focus, ahead of $105, the 23.6% Fibonacci retracement.
On the downside, immediate support is seen at $88, the 50% Fibonacci retracement. Below here, attention turns to $83, the 50 EMA, followed by $80, where the 200 EMA and 61.8% Fibonacci retracement converge. A break below $80 could see sellers gain traction towards $75, the August low, and $72, the rising trendline support.
