Geopolitical Turmoil to Spur Bullish Energy Market Sentiment

CRUDE OIL PRICES OUTLOOK

• Oil prices soften after Monday’s strong rally.
• Despite Tuesday’s move, geopolitical tensions in the Middle East create a constructive backdrop for energy markets in the near term.
• This article looks at oil’s key technical levels to watch in the coming days and weeks.

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Oil prices, as measured by West Texas Intermediate futures, fell on Tuesday, erasing some of the previous session’s rally induced by this past weekend’s events in the Middle East. To provide some context, the militant group Hamas launched a deadly incursion into Israel from the Gaza Strip early Saturday, resulting in the most devastating massacre of civilians in the Jewish nation’s history.

In response, Israeli Prime Minister Benjamin Netanyahu acted swiftly and declared war on the adversary, conducting extensive airstrikes in Gaza to target the Islamic terrorist organization’s strongholds in the coastal enclave. As of Tuesday, the casualty count on both sides has continued to rise, surpassing a grim total of 1800 lives lost according to official sources.

Israel’s position as a minor crude producer should not overshadow the potential significance of the conflict’s impact on oil’s outlook, particularly if major players in the space become entangled in the situation. For example, if strong evidence emerges linking Iran to the terrorist attacks, the West could be forced to impose new economic sanctions on the country, with the aim of blocking its energy exports, a move that could further tighten markets.

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To anticipate future market dynamics, traders should watch closely how the geopolitical landscape in the Middle East evolves. If tensions escalate and bring the United States and Iran into direct confrontation, oil prices could soar overnight. This risk is heightened if Tehran decides to close the Strait of Hormuz in retaliation for any perceived aggression, as this navigational passageway is of paramount importance to global supplies.

From a technical standpoint, oil prices are sitting above the psychological $85.00 mark after Tuesday’s pullback, close to the 50-day simple moving average, a key support to watch in the short term. If the bulls fail to defend this floor and prices fall below it in a decisive way, we could see a descent towards the $83.00 handle, which corresponds to the 38.2% Fibonacci retracement of the 2023 rally.

On the other hand, if WTI manages to resume its advance, initial resistance appears at $88.00. Although it may be difficult for buyers to overcome this barrier, a breakout could reinforce the upward pressure and pave the way for a retest of this year’s high.

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CRUDE OIL (WTI FUTURES) TECHNICAL CHART

Light Crude Oil Futures Chart Created Using TradingView