After oil prices plummet by more than 9%, three major factors are poised to initiate a new upward cycle for the global oil market. How high could this newly formed trend potentially drive the price of crucial energy?
Oil price three main drivers
On the eve of the 50th anniversary of the world's first oil crisis, warfare in the Middle East has once again bolstered crucial energy prices, causing them to rebound from a sharp decline in the past week.
While Israel's influence on global oil supply is limited, the most fearful threat lies in the potential escalation of conflict involving both the US and Iran. Iran has become a substantial source of additional crude oil this year, which has helped mitigate what would otherwise be extremely tightening markets. The uncertainty surrounding the supply outlook has driven oil prices up by nearly 4% in just two days.
Meanwhile, another unexpected driver for oil prices surfaces this week.
A noticeable dovish shift among Federal Reserve members is prompting investors to bet on "no more" rate hikes for the months and year ahead. For instance, Dallas Federal President Lorie Logan made a speech on Monday, October 9th, stating that: "Higher term premiums result in higher term interest rates for the same setting of the fed funds rate. Thus, if term premiums rise, they could help cool the economy to some extent, reducing the need for additional monetary policy tightening to achieve the FOMC's objectives."
While it may still be too early to definitively declare an end to the US central bank's tightening cycle, it is a reasonable expectation that the more cautious the Fed members are, the less likely interest rates will continue to rise. This scenario is undoubtedly viewed as positive news for the economic outlook and is expected to benefit oil prices as well.
Thirdly, despite last week's OPEC+ meeting failing to significantly boost oil prices, the consequences of months-long supply constraints have already begun to strain major oil consumption nations.
According to the EIA Petroleum Status Report released on October 4th, crude oil stocks in the US declined by 4.21 million barrels in the week ending September 29th, marking the sixth drawdown in the last eight weeks. Furthermore, on a global scale, the International Energy Agency has issued a warning that the production cuts implemented by these two major oil suppliers could result in a 'significant supply shortfall' by the end of the year.
In general, it appears that the disruptions and uncertainties on the supply side, along with steady demand growth, will continue to feed into the upward trajectory of the essential energy market.
WTI Technical Analysis
The pullback on Tuesday suggests that traders are adopting a wait-and-see stance in response to the rapidly changing geopolitical tensions, assessing how this could potentially impact the energy market on a broader scale.
From a technical standpoint, the surge over the past weekend has prompted the price to challenge its 50-day moving average, which currently sits at $85.40, with support from the August peak at $83.82. Only a breakthrough above the $85 level will allow the price to retest its previous trendline, expected to act as a near-term resistance. On the flip side, the price range between $82.30 and $83.70 should be capable of halting or slowing any further retreat.
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.