Despite Recent Rally, Oil Markets Stay Bearish

WTI oil has quickly moved from $67.00 to $78.00 as traders focused on the risk of a direct war between Israel and Iran.

However, an indication of Hezbollah’s support for a ceasefire proposal from Lebanon’s government was sufficient to trigger a major sell-off in the oil markets. WTI oil and Brent oil lost about 5% as traders reacted to the news.

It should be noted that any ceasefire proposal should be accepted by Israel, which aims to destroy Hezbollah’s ability to attack the country. In addition, Israel has reserved the right to retaliate against Iran.

However, it looks that oil traders do not worry about potential supply disruptions in the Middle East. Put simply, the market sentiment remains bearish.

The risks of a war between Israel and Iran provided temporary support to prices, but traders have quickly started to take profits off the table.

From a big picture point of view, the oil market needs support from China, which has recently unveiled stimulus measures that have triggered a strong rally in Chinese markets. The previous measures did not bring material results, so oil traders remain skeptical.

Most likely, oil traders will demand tangible evidence of China’s economic improvements before they would be ready to increase their long positions for the long-term.

It should be noted that OPEC+ production policy remains a key risk for oil markets. OPEC+ was forced to postpone its production increase due to the pullback in the oil markets, but its members look worried about the loss of market share.

In case oil prices stabilize near the current levels, OPEC+ may start increasing its production in December, which will be bearish for oil markets. In this light, strong economic data from China is required to provide sufficient support to oil prices in case OPEC+ starts boosting production.

For a look at all of today’s economic events, check out our economic calendar.