Forex Trading Library

Where’s the Ceiling for Oil?

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Geopolitics is pushing the price of crude higher, leaving behind analysts’ predictions that the price of “black gold” would remain subdued this quarter. Overnight, the price of Brent jumped above $90/bbl, after weeks of progressive gains

Beyond the commodity that is essential for logistics, heating and utilities, price pressures in the US and Europe are renewing. American gasoline prices have moved back to the highs not seen since last November. If current trends are maintained, it could derail expected central bank moves towards easing in the near term.

Conflict and Higher Prices

The price of crude has risen along with tensions in the Middle East. The two main events that have sparked the current consternation are Israeli airstrikes, one on a high-ranking Iranian official in Damascus and the other hitting aid workers in Gaza. The first has a strategic component, and the second a political one. Combined they have increased fears that the conflict could significantly escalate.

On the political side, the deaths of the aid workers has increased pressure on Israel to declare a ceasefire, with the White House reportedly given an “ultimatum”. But concurrently the UAE has withdrawn diplomatic ties from Israel in protest over the death of the aid workers. This is important because the UAE has been crucial for negotiations between Israel and Hamas, which lead to prior ceasefires and hostage exchanges.

Reaching a Tipping Point

With Israel facing a significant diplomatic setback, markets are concerned about how Iran will respond to the death of one of its key military commanders at the hands of an Israeli airstrike. The historic parallel is the death of Kasim Solemani under the Trump administration, to which Iran responded by shelling a US military base in Iraq. But Israel doesn’t have military bases near Iran, which narrows the scope of potential retaliatory actions.

The Islamic Republic does have missiles capable of reaching Israel, but they would have to traverse Iraq, which is not on good terms with either nation. The main worry is if Iran were to prompt Hezbollah located in southern Lebanon to fire rocket barrages against Israel. Militants in Lebanon have made limited attacks on Israel since the start of the war, but not on the scale that is seen as an escalation of the conflict. The worry is that if Hezbollah’s attack is sufficiently large, Israel might respond by once again invading southern Lebanon to secure its northern border. That would be a major escalation of the conflict, and could put transport of crude from the Middle East under increased threat.

Its Headlines, not Fundamentals

For now, analysts caution that the price of crude has been rising out of concern over potential escalation of the conflict in Israel, not in response to a fundamental shift in supply and demand dynamics. Should the situation eventually cool down, then the price of crude might resume its prior trajectory.

With both sides of the political spectrum in Israel vowing to press the attack on Gaza until Hamas is destroyed, the conflict is likely to continue for some time. Which means tensions are likely to be high for at least several weeks if not months. Any further disruption of crude supplies could push the price up again, possibly into the triple-digit range.

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