Oil outlook: Israel & Iran conflict dominates Oil Prices
Since our previous report, oil prices have been increasing, a trend that was further exacerbated by Iran’s missile attack on Israel on Tuesday. In today’s report, we examine the current state of the US oil market, the Middle East situation, the demand side of the international oil market, and the OPEC ministerial meeting. The report will conclude with a technical analysis of the daily chart of WTI.
The US oil market is emitting a variety of signals.
In the past few days, the US oil market has sent a variety of signals. We begin by noting that the Baker Hughes oil rig count from last Friday indicated that the number of active oil platforms in the United States decreased by 4, reaching 484. The release appeared to suggest that the US oil market was in a state of slack, as the closure of four active oil platforms may have been the result of decreased demand. The API weekly crude oil inventories figure, which was released on Tuesday, indicated a nearly -1.5 million barrel decrease in US oil inventories, as opposed to the previous reading of -4.339 million barrels. However, the drawdown implied that oil production was not able to reach aggregated demand levels, despite the narrowing. Consequently, the US oil market could be considered constrained under these circumstances. On the other hand, the Energy Information Administration (EIA) reported a substantial increase in oil inventories of 3.889 million barrels on Wednesday. This suggests that oil production in the United States was greater than the demand for oil, which could be interpreted as a pessimistic signal for oil prices. An adverse effect on oil prices may be observed in the upcoming week if we observe more evident indications of a decline in the US oil market.
The likelihood of a regional conflict in the Middle East is on the rise. The significant bullish movement in oil prices on Tuesday may have been primarily due to Iran’s missile attack on Israel. It is noteworthy that the US open on Tuesday was adverse for oil prices, as the market began to position itself in anticipation of the attack. The Iranian attack resulted in minimal casualties and involved the firing of a significant number of missiles at military targets in Israel. The attack was effective in that Iron Dome was unable to prevent a number of missiles from reaching their intended targets, thereby exposing the relative vulnerability of Israel’s air defenses. However, it is also important to acknowledge that Iran had previously informed the United States of the attack’s timing and size, and it is reasonable to presume that this information was communicated to the Israelis. We perceive the Iranian attack as moderate, despite its magnitude, which may suggest a potential reduction in the escalation. However, Israel is anticipated to respond, and the issue remains: how forcefully will it do so? The United States has cautioned Israel against striking Iran’s nuclear energy facilities, despite the fact that they are a potential target. Khark Island is another potential target that is directly associated with the international energy market. If the Israelis were to strike the island, it could result in a significant increase in oil prices, as market concerns regarding a potential shortage of oil supply for the international oil market could arise. The island is Iran’s primary oil exporting center. Conversely, a more moderate response from Irael could alleviate market anxiety and facilitate a downward correction in oil prices.
The joint ministerial conference of OPEC
The other factor that has been at play over the past few days is the ministerial meeting of OPEC that took place yesterday. The Organization underscored the critical importance of attaining full conformity and compensation in its press release, as a result of the tightening of oil production. However, Reuters reports that OPEC has sufficient spare oil capacity to offset a complete loss of Iranian supply in the event that Israel disables the country’s facilities. However, the producer group would face difficulties if Iran retaliates by attacking the installations of its Gulf neighbors. It is essential to acknowledge that Iranian oil exports have increasingly influenced the international oil market in the past year, despite the sanctions imposed by the United States. In general, we believe that OPEC should play a positive role in the context of oil prices. However, recent discussions regarding the potential relaxation of oil production cutbacks by Saudi Arabia have resulted in a decrease in oil prices.
International Oil Market Demand
We observe that the outlook of oil demand was influenced by the continued contraction of economic activity in the manufacturing sectors of China and the United States on the demand side of the international oil market. The pertinent PMI figures for the past month have consistently reported a continuation of the contraction of economic activity in the aforementioned sectors, which is a characteristic. In addition, the Federal Reserve’s intention to reduce rates at a slower pace than market expectations, as demonstrated by Fed Chairman Powell’s speech on Monday, may impose additional pressure on economic activity, thereby affecting oil prices.
