- Recent developments in the Middle East have sparked fears of a full-scale conflict.
- The unfolding events hold significant implications for commodity markets, particularly crude oil.
- Looking ahead, however, structural factors highlighted by the IEA indicate oil prices will continue to fall in the long term.
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In recent days, tensions in the Middle East have escalated, raising concerns of a full-scale war in the region after Iran's airstrikes on Israel. The situation remains fluid, and all eyes are on Israel's potential response, which seems imminent.
Upcoming events could significantly impact commodity markets, especially crude oil. In the worst-case scenario, prices could soar above $100 per barrel.
But structural supply factors, highlighted in a statement from the International Energy Agency (IEA) recently could pull crude oil prices lower in the long run.
The recent surge in oil prices can be attributed to a mix of geopolitical tensions in the Red Sea region, increased demand from China, production cuts by OPEC+, and positive data on the US economy.
Crude Oil Price Will React to Geopolitical Developments
In the best-case scenario, Israel refrains from retaliation (though unlikely) or responds in a limited manner that prevents further escalation.
However, an aggressive stance from both sides could escalate tensions, potentially leading to a blockade of the Strait of Hormuz, and disrupting the transport of up to 2 million barrels per day.
Most analyses suggest that barring the optimistic scenario, oil prices could rise towards $100 per barrel or higher, delaying potential interest rate cuts by major Western Central Banks.
Oil Likely to Head Lower in the Long Term
Looking further ahead, the International Energy Agency anticipates downward pressure on prices beyond 2025.
This projection is based on expectations of increased production from non-OPEC+ countries like the US, Canada, and Brazil, coupled with a slowdown in global crude demand due to the rise of electric vehicles.
Considering these factors, building short positions in anticipation of price hikes due to Middle East tensions could be a viable long-term strategy.
In the immediate context, WTI crude oil bulls might face some challenges as the bullish momentum observed since the beginning of the year has slowed down in recent days.
However, this slowdown appears more corrective than indicative of a significant downward trend.
If the upward trend keeps going, buyers should aim for around $90 per barrel, which marks the local supply zone. If they're eyeing the big $100 milestone, they'll need to push past the 2023 peak of $95 per barrel first.
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Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered as investment advice.