Oil News: Crude Oil Futures Surge as Market Prices Worst-Case Iran Supply Risk

Crude Oil Shifts From Best-Case to Worst-Case Pricing

The crude oil market appeared to be pricing in a best-case scenario for the outcome of the U.S.-Iranian war most of last week, but conditions started to heat up on Friday, ahead of the weekend. The move was likely fueled by an “anything can happen over the weekend” tone and if it does, it will probably be bullish.

The early price action also hinted at a relative calm as if investors were preparing for a short-term crisis instead of a prolonged crisis. Furthermore, what looked like resistance at $95.00 to $100.00, now could become new support with investors zeroing in on the $130 level, which has not been seen since Russia invaded Ukraine.

The early Sunday gap tells us everything about how traders are reading the weekend developments.

The Best-Case Scenario Is Off the Table

I think the current price action no longer reflects the best-case scenario. Maybe last week, investors initially believed Iran would lay down after mounting a weak defense. Perhaps they thought with Supreme Leader Khamenei dead, a democratic Iran would reopen its economy, the U.S. would lift sanctions and more oil production from the country would drive prices lower.

Traders Are Now Pricing In a Fragmented Iran

With the weekend price jump, all of those events are probably off the table as traders now begin to price in a worst-case scenario. And what does this mean? It likely means traders are now pricing in more of a fragmented state like post-Gaddafi Libya, or even worse, a government held together by the IRGC.

$100 Looks Like the New Floor

In this case, prices could continue to spike higher with volatility expected to remain elevated. So while we don’t foresee oil sitting near $130, for example, for a prolonged period of time, we can see new support developing around the $100 level. This remains a distinct possibility because over the weekend, we saw Iranian oil infrastructure destroyed. This is going to take months to repair.

A New Supreme Leader Means Back to Square One

We also saw Khamenei’s son named the new Supreme Leader. This sends a strong signal that the IRGC is still in control and wielding a major influence on Iranian politics. It also means that the U.S. and Israel will continue to attack in order to take out the new leader. Their missions are to destroy all of Iran’s nuclear capability and to return the country to the people, but with the appointment of a new leader, it looks as if we’re back to square one.

Three Issues That Will Drive the Market This Week

Issues this week will include attempting to free a fifth of the world’s oil supply trapped behind the Strait of Hormuz, eliminating the IRGC or reducing its strengthening governing rule and forcing the country to surrender or at least try to negotiate a ceasefire.

Key Targets and Support Levels to Watch

Technically, there is no real resistance in a momentum driven market, only targets. With the market taking out a number of former tops since Friday, key targets come in at $123.00 and $130.00. We’re not the type to sensationalize a rally by just throwing numbers out there, but if you do the calculations tied to a two-week shutdown of the Strait of Hormuz, $150.00 is a reasonable target.

In the meantime, we could see some backing and filling, but that’s just positioning and trading, unless it’s linked to a specific bearish development. Our support is likely to be old tops like $102.39 to $100.24, followed by $79.56 to $75.05.

More Information in our Economic Calendar.