Oil: Middle-East Tensions Lift Prices, but Trend Remains Bearish - $50 Next?

After the turmoil of 2022, when the war in Ukraine erupted, we have seen a consistent decline in Crude oil prices, a trend that continued into the last quarter of last year, despite the successive cuts announced by OPEC+ and the Israel-Hamas war.

Many anticipate the continuation of a downward trend in oil prices as forecasts for the next twelve months typically get published around the turn of December and January

However, the short-term outlook suggests potential local increases, driven by the ongoing instability in the Middle East region.

Given the possibility of an escalation of the conflict in the Gaza Strip to other countries in the region in the coming quarters, this will be a major factor of uncertainty in the context of oil prices on global markets.

Increasing Oil Production by Non-OPEC+ Countries Could Pressure Prices

According to the IEA, global demand for crude oil is expected to increase by 1.1 mbpd, and this is amid a possible continuation of the economic slowdown in the US, Europe, and, above all, China.

Despite this, downward pressure on oil prices will be exerted by increasing supply, which should be generated mainly outside OPEC+ countries. In this case, we are talking about increases in production volumes in Brazil, Norway, Canada, Guyana, and, above all, the US.

In the latter, we are already seeing increased activity, which has driven production growth to near-record levels of 13.24 mb/d. This makes a return to an upward trend currently highly unlikely without significant geopolitical events.

In response to these forecasts, OPEC+ member countries have issued a joint statement that emphasizes the cartel's unity and readiness to move further if necessary.

Despite this, don't forget that the cartel's ability to influence the price of oil is increasingly limited, as production cannot be cut indefinitely and the rest of the world's output is on the rise.

Unstable Situation in the Middle East Could Lift Prices in the Short-Term

Since the outbreak of the Israeli-Palestinian conflict, the situation in the Middle East has remained under close scrutiny by investors.

Developments have been particularly exacerbated by incidents in recent days, among them the slowdown in production at Libya's Sharara oilfield producing 300,000 barrels of oil per day, and the continuation of attacks on merchant ships in the Red Sea by the Yemeni armed group, the Houthi Rebels.

This caused a moderate price increase of $4-5 at the beginning of the year, but this does not change the overall technical position. The situation could potentially escalate due to increasingly clear declarations by a coalition of 11 countries committed to protecting Red Sea shipping, led by the US.

It should be noted that about 15% of the total global volume is transported through the Red Sea basin, so a possible paralysis of the area will have serious consequences.

Brent Oil: Technical View

As a result of the continuation of the downward trend in Brent oil, which in the current wave has been going on since last September, the supply side is once again testing the key support area located in the price area of $72 per barrel

In the short term, we may witness a defense and extension of the rebound at least to the area of $84 per barrel, where local resistance falls especially if tensions in the Red Sea and Lebanon escalate.

The longer-term perspective, however, favors the supply side which, if it manages to go below $70, will open the way for an attack on lower levels with another target just below $50.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counseling or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. As a reminder, any type of asset is evaluated from multiple perspectives and is highly risky, and therefore, any investment decision and the associated risk remains with the investor.