The conflict in the Middle East is unfolding as expected: escalation followed by de-escalation. As a result, investors expect Brent to quickly return to pre-conflict levels. However, that is not guaranteed. Let’s examine the key drivers and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- China’s oil imports are increasing.
- Saudi Arabia’s alternative shipping routes are blocked.
- Global reserves are nearing critical levels.
- Consider buying Brent, targeting $95 and $100.
Weekly Fundamental Forecast for Oil
The markets have seen this play out before. Donald Trump halts the airstrikes and says talks with Iran are making progress, while Tehran denies negotiations are even taking place. Investors assume the standoff will eventually end in a deal, just as it has before. That assumption has prompted traders to sell Brent, expecting prices to retrace the swings seen between March and June. But this time, the market may be underestimating how much has changed.
According to Macquarie, the oil market is expected to return to a surplus of 2 million barrels per day by Q4 as Washington comes under growing domestic pressure to bring the Middle East conflict to an end. Donald Trump’s approval ratings are slipping, while the risk of Republicans losing the November midterm elections is increasing. For now, however, the market appears to be overestimating how long it will take the US and Iran to reach an agreement. It is more likely to be a matter of weeks than months.
The latest attack on US bases in Jordan suggests Tehran is determined to prolong the conflict. It appears to be waiting for Donald Trump to become more willing to compromise as the election approaches. At the same time, the factors that had helped stabilize the oil market are fading. As a result, the pattern seen previously, with Brent quickly returning to pre-conflict levels, is far less likely to repeat itself, at least as quickly as it did last time.
China’s Crude Imports
Source: Bloomberg.
Chinese crude imports were one of the market’s main stabilizers. In June, however, imports fell to 6.2 million bpd, the lowest level since 2015, adding to downward pressure on prices. Preliminary Bloomberg data, however, show that shipments to China rebounded to 7.8 million bpd in July. If that recovery continues, Brent bears will lose an important edge.
Another source of stability was Gulf producers, led by Saudi Arabia, seeking alternative export routes. However, the Yemeni Houthis’ blockade of the Bab el-Mandeb Strait has cast doubt on the prospect of the oil market returning to surplus by Q4. With US export growth constrained and global inventories shrinking rapidly, the outlook for Brent bears is becoming increasingly challenging.
Markets are once again forced to assess how soon the conflict in the Middle East could end. According to Société Générale, each month the conflict continues would add roughly $10 a barrel to Brent prices.
The White House appears unconvinced by the previous deal, while Iran is seeking additional concessions. With Washington’s options narrowing, any escalation would provide further support for oil prices.
Weekly Trading Plan for Brent
After reaching a bullish target of $99, the Brent price pulled back. Thus, consider opening long trades, targeting $95 and $100.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of UKBRENT in real time mode
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