Rising tensions in the Middle East keep oil markets on edge

The most important factor driving the price of crude oil this week was the escalating geopolitical tension in the Middle East. The ongoing conflict between Israel and Hamas has created a volatile situation that threatens to spill over into a wider regional conflict. The assassination of a Hamas leader prompted Iran to promise a severe response, raising fears of possible retaliation.

The Middle East is a key oil-producing region, and any supply disruption could have a significant impact on global oil markets. The US responded by deploying additional military resources to the region, raising concerns about potential disruptions to oil supplies.

The fear of possible supply disruptions creates a risk premium in the price of oil. Analysts warn that any escalation could threaten key oil transit routes, putting more than 20 million barrels a day at risk. This geopolitical risk was a major factor in pushing West Texas Intermediate (WTI) prices above $78 a barrel.

Economic indicators: a mixed bag of data

This week saw a flurry of economic data weighing on oil prices, with some indicators pointing to strength while others hinting at weakness. Positive retail sales data for July and a drop in jobless claims renewed confidence in the US economy, helping ease recession fears and providing support for oil prices.

The US consumer price index (CPI) rose 0.2% month-on-month in July, as the annual rate of inflation fell…

The most important factor driving the price of crude oil this week was the escalation of geopolitical tension in the Middle East. The ongoing conflict between Israel and Hamas has created a volatile situation that threatens to spill over into a wider regional conflict. The assassination of a Hamas leader prompted Iran to promise a severe response, raising fears of possible retaliation.

The Middle East is a key oil-producing region, and any supply disruption could have a significant impact on global oil markets. The US has responded by deploying additional military resources to the region, raising concerns about potential oil supply disruptions.

The fear of possible supply disruptions creates a risk premium in the price of oil. Analysts warn that any escalation could threaten key oil transit routes, putting more than 20 million barrels a day at risk. This geopolitical risk was a major factor in pushing West Texas Intermediate (WTI) prices above $78 a barrel.

Economic indicators: a mixed bag of data

This week saw a flurry of economic data weighing on oil prices, with some indicators pointing to strength while others hinting at weakness. Positive retail sales data for July and a drop in jobless claims renewed confidence in the US economy, helping ease recession fears and providing support for oil prices.

The US consumer price index (CPI) rose 0.2% month-on-month in July, with the annual inflation rate falling below 3% for the first time in nearly three and a half years. This moderation in inflation has strengthened the case for potential interest rate cuts by the Federal Reserve.

Lower interest rates could boost economic activity and increase demand for oil. The prospect of lower rates created optimism in the market, partially offsetting bearish factors. Speculation about potential US interest rate cuts provided some support for oil prices, contributing to Thursday’s rebound.

Supply and Demand Factors: Conflicting Signals

The US Energy Information Administration (EIA) reported an unexpected increase in crude oil inventories of 1.4 million barrels for the week ended August 9. That contrasts sharply with the expected 2.2 million barrel draw and marks the first rise in inventories since late June.

Globally, the International Energy Agency (IEA) and OPEC cut their forecasts for demand growth, citing a weaker-than-expected performance in China’s economy. China’s crude imports fell to their lowest level since September 2022 in July, while refinery output fell for a fourth straight month.

The unexpected rise in US crude inventories suggests that US demand may not be as robust as hoped. Meanwhile, China’s economic slowdown casts a shadow over the outlook for global oil demand growth. These factors are putting downward pressure on oil prices, limiting potential gains from geopolitical risks and positive US economic data.

Seasonal factors: The summer driving season is declining

As August draws to a close, the summer season in the US enters its final stretch. This usually signals a decrease in demand for gasoline, which can put downward pressure on oil prices.

The transition from summer to fall often causes gasoline stocks to rise as demand falls, while crude stocks may rise due to reduced refinery runs. Refineries typically begin maintenance cycles and switch from summer to winter gasoline production during this time, which can temporarily decrease total fuel production. This seasonal change in refinery operations and inventory patterns can create short-term price volatility in both the crude oil and refined product markets.

Next week’s EIM inventory report will be crucial in confirming this seasonal trend. If it shows a significant increase in gasoline inventories or a decline in refinery utilization rates, it could reinforce bearish sentiment in the market. Traders should watch these indicators as potential catalysts for price moves in the coming weeks.

Weekly light crude oil futures

Trend indicator analysis

The main trend is up, but the new lower secondary top at $83.11 is a sign of a bearish trend. A trade through this level and $84.83 will reaffirm the uptrend. The main trend will change down to a move of $70.67.

As of Thursday’s close, the market is trading higher for the week, putting it in position to post a second straight close higher on the weekly chart.

The minor range is from $70.67 to $83.11 with a pivot at $76.89. The short-term range is $84.83 to $70.67 with a pivot at $77.75. The two pivots form an important price group that can control the direction of the short-term trade.

The strongest retracement zone from $74.60 to $72.19 is solid support. Essentially, it controls the medium-term direction of the market, providing hope for the bulls and a potential trigger point for a steep decline for the bears.

Recent price action clearly indicates that traders believe that $71.67 to $70.67 is a value zone.

Weekly technical forecast

The direction of the weekly light crude oil futures market at the end of the week of August 23 will likely be determined by the trader’s reaction to $77.75 and $76.89.

Optimistic scenario

A sustained move above $77.75 will signal the presence of strong buyers. If this creates enough short-term momentum, then we could see a move to $80.16. This is a potential trigger point for an upward acceleration.

Bearish scenario

A sustained move below $76.89 will indicate the presence of sellers. If it generates enough downward momentum, then we could see a retest of the major retracement zone from $74.60 to $72.19 or the value zone from $71.67 to $70.67. If the main bottom at $70.67 fails to hold, then look to the downside.

Market Outlook: Bearishly cautious, with upside risk

Looking ahead to next week, the outlook for crude oil prices looks cautiously bearish, but with significant upside risk due to geopolitical tensions. West Texas Intermediate (WTI) is expected to trade in a range, with key support at $76.89 and resistance at $77.75. However, prices could break out of this range to the upside if geopolitical tensions in the Middle East escalate unexpectedly.

Traders should closely monitor several key factors that could influence price movements. Developments in the Middle East, particularly any escalation of conflict, remain a primary concern. US economic data, including jobless claims and retail sales figures, will provide insight into the health of the world’s biggest oil consumer. Statements by the Federal Reserve regarding potential interest rate cuts could affect the dollar and, consequently, the price of oil. China’s economic indicators, especially those related to oil demand, will be crucial in assessing global consumption trends. In addition, any surprise announcement from OPEC+ regarding production levels could cause significant market reactions.

While the broader outlook is skewed by concerns about global demand and recent inventories, geopolitical risks in the Middle East provide a strong counterbalance. Traders should brace for continued volatility, with prices likely to fluctuate based on Middle Eastern headlines and economic data. The market remains well balanced between bearish economic factors and bullish geopolitical risks, making it essential for investors to remain alert to both macroeconomic trends and geopolitical developments. Any of these factors could trigger significant price moves in the coming week.