Oil Price Forecast: Brent and WTI Eye Breakout as Fuel Shortage Risk Grows

Oil prices pulled back on Tuesday after a sharp rally on Monday, but the decline does not remove the bigger risk in the market. The Strait of Hormuz continues to draw the attention of traders as renewed tensions between U.S. and Iran have triggered fear of supply disruption. Brent oil dropped to around $113 per barrel, whereas WTI oil dropped to around $104 per barrel. The action may be more profit taking after Monday than an indication that the situation is returning to normal. Oil prices continue to rally after this quick correction. The market is still sensitive as the war now turns from a political threat to the actual shipping and fuel supply threat.

Strait of Hormuz Tensions Keep Oil Supply Risks Elevated

On Monday, the prices of Brent and WTI oil rose sharply as the US-Iran war continued to support the energy prices. This matter got even worse as the United Arab Emirates was targeted by Iranian drones and missiles. Washington also reported sinking Iranian ships in the Strait of Hormuz. These events enhanced the panic that trade transportation across the waterway could be further disrupted. That is significant to oil since the strait has long been one of the most significant routes for global flows of crude and fuel.

President Donald Trump has increased his warnings to Iran. He stated that if Iran attacked US vessels to protect commercial shipping, then there would be high price to pay. President Trump also announced that South Korean cargo ship was being fired on in the Strait of Hormuz. He suggested that South Korea may become involved with operations.

The underlying interest is now shifting out of crude prices. According to Goldman Sachs, global inventories are not yet at very low levels. But the rate of drawdowns is now becoming uncomfortable. The bank also reported that buffers on refined products are rapidly dwindling, particularly in naphtha, LPG and jet fuel. This means that the world would suffer a shortage of fuel in the case of a closure of the Strait of Hormuz.

This is significant since the market might not just be exposed to increased prices. It can also experience physical deficits in the regions that are heavily dependent on imported fuel. Goldman Sachs also cited the existence of a greater risk of product scarcity in South Africa, India, Thailand and Taiwan. This continues to hold oil prices at bay even following a short term decline.

WTI Oil Technical Analysis – $120 Breakout Could Trigger Strong Rally

From a technical perspective, WTI crude oil has been consolidating between $80 and $120 since the U.S.-Iran war started. However, the formation of rounding bottoms each time the price drops indicates price strength.

Therefore, a break above $120 in WTI crude oil will signal a strong surge in prices during the next few weeks.

This bullish pressure is also observed on the monthly chart, where the recent consolidation is seen due to strong resistance at $110. A monthly close above $110 will open the door for a move towards the $125-$130 area.

However, a monthly close above $130 will open the door for a move towards the $150 area.

Brent Oil Technical Analysis – Price Compression Builds Near $120 Resistance

Brent crude oil shows very constructive price action, as seen in the daily chart below. The price has broken the strong key resistance of $90 after the U.S.-Iran war. After this breakout, the price surged to mark a high at $120.

However, the recent correction back towards the breakout of $90 indicates strong constructive price action. After the retracement, the price again surged to $120 and is now consolidating at the resistance level. The retracement back to $90 and then rebound back to $120 increases the possibility of upside breakout.

A confirmed break above $120 will indicate an even more bullish price picture in the Brent crude oil market. Moreover, the RSI is consolidating above the mid-level and approaching the 70 level, which indicates further upside over the next few weeks.

Bottom Line

The U.S.-Iran war can keep supply risks high in the Strait of Hormuz, and oil prices may continue to remain volatile. The short term pullback in Brent and WTI appears to be more of profit taking than a trend change. The presence of tight refined product buffers, falling inventories and higher fuel shortage risks all support the bullish argument.

The technical picture is also constructive with WTI ranging between $80 and $120 and Brent building toward price compression at $120. A confirmed breakout above these resistance levels may lead to another bullish run to $150. Any evident ceasefire or reopening of shipping routes would not immediately bring the prices lower but it would stabilize the market around $100 until the real supply issue is resolved.

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