Is the rally in crude oil prices over?
Crude oil prices rallied on Friday, reaching a new medium-term high of $77.62 - the highest level since January - and closed 7.26% higher after briefly pulling back below the $73 mark. The wild swings were driven by escalating tensions between Israel and Iran. However, this morning, crude oil is trading 3.4% lower as the market impact on commodities and equities appears to be easing somewhat.
For oil markets specifically, these developments are worth monitoring:
- Israel-Iran Conflict Escalation: Israel and Iran exchanged strikes over the weekend, with Israel first attacking Tehran on Friday including nuclear facilities, followed by Iranian missile retaliation against major Israeli cities including Tel Aviv. Leaders from both sides are signaling little intent to deescalate the conflict.
- Supply Disruption Concerns: The main fear for oil markets is potential disruptions to shipping through the Strait of Hormuz, which handles about a third of global seaborne oil trade. Iran, the third biggest OPEC producer, pumps around 3.3 million barrels per day and exports roughly 1.7 million barrels daily.
- OPEC Response Capacity: The loss of Iranian export supply would eliminate the surplus expected in Q4 this year. However, OPEC has 5 million barrels per day of spare production capacity that could be brought online faster than expected if supply disruptions occur.
- Central Bank Focus: While the Israel-Iran conflict drives near-term oil performance, this week features major central bank meetings including the Bank of Japan (Tuesday), Federal Reserve (Wednesday), and others.
Conclusion
Crude oil rallied on Friday amid escalating tensions in the Middle East, reaching its highest level since January. However, the rally appears short-lived, as the market is pulling back toward the $70 level this morning, retracing most of Friday’s gains. This may lead to a period of volatile consolidation, as the market remains heavily driven by geopolitical headlines.
For now, my short-term outlook is neutral.
Here’s the breakdown:
- Crude oil prices are pulling back from Friday’s high, but the market is likely to remain volatile and news-driven.
- The ongoing tariff-related volatility, combined with economic data, is adding to market uncertainty.
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Thank you.
Paul Rejczak,
Stock Trading Strategist
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