Navigating market uncertainty amid Middle East turmoil

In the wake of escalating violence in the Middle East, we join the global community in extending our heartfelt prayers and hopes for a swift end to the outbreak of horrific violence. Financial markets, meanwhile, are bracing for volatility, as investors attempt to gauge the ripple effects of the conflict on diverse asset classes.

Our previous analysis highlighted two probable trajectories for the conflict. The first confines the hostilities within existing borders, while the second envisions a regional flare-up affecting multiple sectors of the global investment landscape.

In either scenario, the foreseeable consequence is a surge in crude oil prices, although the magnitude will vary depending on geopolitical developments.

US foreign policy and crude oil market dynamics

Rewinding the clock to the Trump administration, Iranian oil exports plummeted to under 500,000 barrels per day. However, with the Biden administration's more lenient stance, Iranian oil exports rebounded to approximately 1.5 million barrels per day, providing some relief to the sky-high energy prices.

Post-Hamas surprise offensive, Israel is likely to advocate for the United States to reimpose sanctions on Iran.

The ripple effect? A predictable uptick in crude oil prices, both in the short-term and potentially the long-term, as sanctions cripple Iran's oil infrastructure investment and maintenance.

Sourcing alternatives to Iranian crude

The US may request other oil-producing nations to increase supply to counter the loss of Iranian exports. However, given that the US has strained relations with Saudi Arabia and Russia, the ability to source and offset the loss of Iranian crude oil appears limited.

Crude oil technical analysis

After spending almost ten months trading within a range above $63.00 and below $84.00, crude oil surged higher to $95.00 at the end of last month in response to production cuts by the Saudis and Russians. The rally was halted as the relentless rise in long-term yields and tightening financial conditions into the end of September prompted a 14% pullback to last week's low of $81.50.

Assuming crude oil holds above last week's $81.50 low, we anticipate crude oil to move higher toward $90, with potential upside risks toward the September high of $95.03.

Crude oil daily chart