- Oil prices retreat but remain supported driven by Israel-Iran tensions and fears over Strait of Hormuz disruptions.
- Crude’s rally stands in contrast to weak demand and rising OPEC+ supplies, making the gains heavily risk-premium driven.
- Traders urged to remain nimble as oil flirts with key resistance levels, awaiting Tehran’s next move.
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The market was volatile in the first half of Monday’s session as traders reacted to the involvement of the US in the Israel-Iran conflict. Prices initially gaped higher in response to the weekend US airstrikes, alongside an intensifying rocket exchange between Israel and Iran. But the initial panic faded as oil prices retreated to close that gap and then fell below Friday’s close.
Still, the short-term balance of risk remains tilted to the upside as investors weigh Iran’s potential response. In the longer-term outlook, we are looking at a murky fundamental backdrop. Demand growth is faltering, and OPEC+ is opening the taps, which is hardly bullish. Yet, for now, it’s not supply and demand mechanics that have the market’s attention—it is an escalating war.
Markets Tread Water, Awaiting Tehran
The big question, of course, is what Tehran chooses to do next. Thus far, Iran’s response has been measured. But the situation could escalate now that the US has entered the fray, with multiple routes for escalation: direct military engagement with US assets, proxy attacks via allies like Hezbollah or the Houthis, or more surgically targeted assaults on oil infrastructure in Saudi Arabia or the UAE.
Strategically, Iran’s options are constrained. Blocking the Strait would also choke off its own oil lifeline to China and other Asian customers. Still, asymmetric attacks—on tankers, pipelines, or ports—could cause disruption without total shutdown.
Strait of Hormuz Disruption Is the Worst-Case Scenario
So far, there has not been any reports of major supply disruptions because of the conflict. At the centre of market anxiety is the Strait of Hormuz, a strategic artery through which nearly 20% of global oil consumption flows daily. Iran has long threatened to disrupt passage through the strait—especially if the US escalates involvement in regional hostilities. Were that threat to be acted upon, the price of oil could conceivably vault into triple digits.
Well, in response to the US attacks, Iran’s parliament has voted in favour of closing the Strait of Hormuz. However, the final decision rests with Iran’s national security council, according to state media. Iran’s Foreign Minister stated that “all options” are under consideration.
Still, that remains a worst-case scenario. It’s just as likely we see a diplomatic U-turn or limited tit-for-tat actions that avoid the most sensitive chokepoints. As such, while prices have risen sharply, the moves remain relatively shallow. But that doesn’t mean things won’t get nasty later this week.
Fundamentals Play Second Fiddle to Geopolitics
As mentioned, the longer-term outlook on oil prices is murky because of a weak fundamental backdrop with weak demand growth and rising supplies from OPEC+ group. Indeed, today’s release of Eurozone PMIs hardly point to demand strength. The manufacturing sector PMI remained at contraction with a print of 49.4, while the services sector barely expanded at 50.0.
So How Do You Trade Oil in This Environment?
As traders, it is imperative we take all necessary steps to mitigate the risk of the volatility in oil prices causing a severe damage to our bottom lines. Regardless of your fundamental views, take nothing for granted in this highly sensitive market.
The coming days will be critical. If the rockets keep flying and the rhetoric intensifies, oil could push higher still. But a de-escalation—or even just a pause—could see the froth come off quickly.
In short, keep your powder dry, your positions light, so you can flip your position without any emotional barrier.
Brent Technical Levels to Watch
Technically, faces resistance around the $78.00 handle. A clean break above this zone could set the stage for a run at $80.00—a psychological milestone and a key test for the bulls. Short-term support sits at $76.00, while $75.00 is the next big level, where prices were trying to stage a recovery at the time of writing. If tensions cool and prices slide below $75.00, we may well find ourselves revisiting the low $70s.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that 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.