Oil Prices Forecast: Middle East Tensions Spark Global Supply Concerns

Key Points

• Middle East drone strikes raise oil supply disruption fears.
• Trafigura reevaluates Red Sea operations after Houthi attack.
• OPEC+ decision crucial for April’s global oil supply outlook.

Drone Strike Heightens Supply Fears

Crude oil prices witnessed a surge on Monday due to increased tensions in the Middle East. A drone attack targeting U.S. forces in Jordan, believed to be orchestrated by Houthi rebels, has raised concerns over potential disruptions in oil supply. This situation is compounded by repeated assaults by the Houthis on vessels navigating the Red Sea, notably impacting a fuel tanker operated by Trafigura. Traders are now awaiting a response from the United States that could escalate the turmoil in the area.

The price action has been volatile early in the session with crude oil jumping substantially on the opening, but then pulling back more than $1.00 as traders sold the initial rally. The lack of speculative buying to sustained the price surge likely led to its intraday collapse.

At 07:27 GMT, Light Crude Oil Futures are trading $78.14, up $0.13 or +0.17%.

Russian Export Reductions Add to Woes

Amid these regional conflicts, the global oil market is also contending with a likely decrease in Russian refined product exports. Damage to several refineries, attributed to drone strikes, is anticipated to curtail Russian oil output. In light of these developments, Brent crude futures leaped to $84.79 a barrel, with U.S. West Texas Intermediate crude reaching $79.29 a barrel before retreating.

Trafigura Reassesses Red Sea Operations

Following a missile attack by the Houthis on the Marlin Luanda tanker, commodities trader Trafigura is now critically reassessing the security risks for its vessels in the Red Sea. This incident underscores a significant shift in the risk of supply disruptions, particularly for tankers linked to the U.S. and UK.

OPEC+ Decisions Loom

The forthcoming OPEC+ online meeting on February 1 is set to be a critical event. With the alliance, led by Saudi Arabia and Russia, considering its production levels for April and beyond, their decision could significantly influence global oil supply. Despite no immediate policy changes expected during this meeting, the group’s stance on extending the current output cuts, totaling about 2.2 million bpd, will be closely watched.

Short-Term Market Outlook: Bullish Trend Expected

In the short term, the oil market appears to be leaning towards a bullish trend. The heightened geopolitical risks in the Middle East, especially the potential for escalated U.S. involvement, are likely to keep supply concerns at the forefront. Additionally, OPEC+’s impending decisions could further shape market direction. If the consortium opts to extend its output cuts, this could provide additional upward pressure on oil prices. As traders closely monitor these unfolding events, the prospect of a bullish week in the oil markets seems increasingly plausible.

Technical Analysis

Light crude oil futures are trading marginally higher on Monday but retreating from intraday highs. Should prices weaken further then support at $77.43 could be tested. Since the intermediate and long-term trends are up. buyers could return on a pullback into the support.

The market is trading on the strong side of the long-term 200-day moving average at $76.49 and the 50-day moving average at $73.69.

A resumption of the uptrend will indicate the return of buyers with $82.68 the next potential upside target.