Oil expands for a third day as tensions rise in the Middle East

• Oil tops $75.00, Israel and Hezbollah engage in tit-for-tat attacks.
• The recent upsurge in tensions and violence could stall negotiations for a Gaza ceasefire.
• The US dollar index is trading back to 101.00 after last week’s sharp decline.

Oil prices rose on Monday after violence broke out in the Gaza Strip and Israel and Hezbollah exchanged heavy fire, with more bombing and drone attacks from both sides over the weekend. The major escalation in the region could not come at a worse time, as a Gaza ceasefire agreement is still being negotiated. This violence could put any potential agreement on the back burner and could even spread the conflict to other countries in the region.

The US dollar index (DXY) is licking its wounds after posting one of its worst weekly performances in over a year. US Federal Reserve Chairman Jerome Powell confirmed on Friday that an interest rate cut is coming in September, but markets appear to be getting too far ahead of it by pricing in big rate cuts before the end of the year. If the Fed wants to achieve a soft landing, it needs to taper gradually and slowly, not in big piles as markets expect.

At the time of writing, crude oil (WTI) is trading at $75.60 and Brent at $79.21.

Oil and Markets News: Mayhem Helps Hedge Funds

• Bloomberg reports that Citigroup sees a high risk of a Libyan oil disruption given the recent local crisis with Israel.
• The above is reflected in the Brent-Dubai spread in crude oil prices, which is widening substantially.
• Meanwhile, Libya’s Waha Oil said it would begin to gradually cut production, Bloomberg reports, amid the export freeze.
• China’s biggest crude refiner, Sinopec, is facing headwinds as the country’s economic slowdown weighs on its profits. Demand for diesel in particular remained weak, Reuters reports.

Oil Technical Analysis: It has become a bit too bearish

The oil is in good condition at the beginning of the week. The feared sell-off in hedge funds last week has not happened, and with the recent rally at hand, more positioning may occur. The recent violence over the weekend could even call into question the feasibility of a cease-fire agreement taking place between Israel and Hamas. If any headlines report in this direction, expect to see another steep rally in crude oil prices.

On the upside, the double level at $77.65 aligns with both a downtrend line and the 200-day simple moving average (SMA). If the bulls are able to break through it, the 100-day SMA at $78.45 could trigger a rejection.

On the downside, the August 5 low at $71.17 is working its magic as it managed to pull off a bounce that is now entering its third day. Below $70.00, the high of $68.00 is the first level to watch, followed by $67.11, which is the lowest point of the triple bottom seen in June 2023.

US WTI Crude Oil: Daily Chart