Pick of the Week: What next for oil

At the start of this week, analysts and traders had reasonably assumed that the oil price was poised to jump sharply higher. On Friday, the Houthis, an Iranian backed group, had attacked over 70 sites in Saudi Arabia and, crucially, they also struck the East-West pipeline that allows Saudi oil to bypass the Strait of Hormuz and reach global customers via the Red Sea.  

The attacks caused a halt in production, which is the equivalent of 4mn barrels per day. The Houthis now control tanker traffic through the Red Sea at the same time as tankers in the Strait of Hormuz have been attacked. Saudi Arabia has cancelled some crude deliveries to Europe, but the impact on the oil price has been fairly minimal. 

Brent crude did jump above $108 per barrel at one stage on Monday, however, the oil price did not get back to the May highs. So, why was the oil price so restrained? 

There are a few reasons for this:  

- Firstly, the damage caused to the East-West pipeline was an easy fix, according to American officials.  

- Saudi Arabia has said that the pipeline will begin operating at 50% capacity in the coming days.  

- Although the situation in the Strait of Hormuz is precarious, oil tankers are getting through with ‘dark transits’, when tankers turn off their transmitters. This could restore up to 70% of Strait of Hormuz traffic, according to some reports.  

-The world is also sourcing oil from other places. For example, a record amount of Venezuelan oil is flowing into the US, and the US itself is pumping oil at a record high pace.  

This does not mean that the oil price is about to fall sharply. Physical oil prices are trading at a significant premium, as these need to take into account higher costs including tanker costs and insurance.  

However, the futures market trades more like a financial asset. Traders are weighing up the latest round of attacks on Saudi Arabia, and balancing them against the time it will take to repair the East-West pipeline, and other sources of supply, which is limiting Brent’s upside to $108,. Monday’s high, for now.  

From a technical perspective there are some key levels to watch. It is worth noting that the oil price is driven by geopolitics rather than technical set ups for now, and it is worth staying disciplined and exercising caution when trading oil as sentiment can change quickly.  

Resistance: $108 per barrel  Support: initial or minor support at $105 and then $103.10. If the oil price breaks below this level then $100 comes back into play as a psychologically important zone for Brent. $95-$96 is the 20-day sma, which is a more solid level of support.  

Chart 1: Brent crude oil