Oil Market Rebound From Technical Support Amid Rising Middle East Tensions

Brent crude oil has recently experienced a notable recovery, driven by economic shifts and geopolitical tensions. After dropping below $72, prices rebounded following the US Federal Reserve’s rate cuts. This recovery also comes amid fluctuating inventory levels and uncertainty in demand from China. This article discusses the fundamental and technical factors to understand the next move in the oil market.

Brent Oil Recovers on Economic and Geopolitical Factors

Brent crude oil prices have regained positive traction following a modest pullback on Wednesday, continuing the recovery from last week’s low of $68.455. Oil prices rose to over a two-week high due to renewed buying interest, which is fueled by expectations of increased demand driven by global economic activity. The recent upturn highlights growing investor confidence in oil markets, supported by favourable developments in the US and abroad.

One of the key factors behind the rising oil prices is the Federal Reserve’s decision to cut interest rates by 50 basis points on Wednesday. This rate cut begins the new easing cycle. This move has raised optimism about a recovery in economic activity, which would likely increase energy demand. Moreover, the US Dollar has weakened before this decision, which has supported higher crude oil prices as a weaker dollar makes oil cheaper for holders of other currencies.

On the other hand, geopolitical developments in the Middle East play a crucial role in supporting oil prices. Tensions have escalated following the explosion of walkie-talkies used by Hezbollah. Lebanon has emerged as a potential flashpoint for oil supply disruptions, particularly with the risk of direct Iranian involvement in a broader regional conflict. These tensions have provided a tailwind for crude oil prices, as geopolitical risks increase market volatility and uncertainty.

Moreover, US crude oil inventories showed a larger-than-expected decline of 1.63 million barrels, as shown in the chart below. There were also builds in gasoline and distillate stockpiles. The overall decline in crude stockpiles could lend near-term support to oil prices. However, lingering concerns about weak global demand, particularly from China, could limit further price appreciation. Additionally, the International Energy Agency (IEA) has revised its demand forecasts downward, which is driven by concerns about China’s economic slowdown.

Overall, the recent recovery in Brent crude oil prices reflects renewed buying interest and investor confidence. The Federal Reserve’s decision to cut interest rates by 50 basis points has weakened US Dollar and supported higher crude prices by making oil more affordable for global buyers. However, escalating geopolitical tensions in the Middle East increases the risk of supply disruptions from Lebanon and potential Iranian involvement. Additionally, the larger-than-expected decline in US crude oil inventories provides near-term price support.

Supply and Demand Dynamics

Global oil demand growth has slowed significantly in 2024, marking its weakest performance since 2020. The primary factor behind this deceleration is China’s declining consumption, which contracted for the fourth consecutive month in July, reducing demand by 280 kb/d year-over-year. The overall demand growth for 2024 is expected to average 900 kb/d, a sharp decline from the 2.1 mb/d growth seen in 2023. This brings global oil demand to nearly 103 mb/d for the year. The forecast for 2025 shows only a marginal improvement, with an expected increase of 950 kb/d, reflecting a continued subdued demand environment in China.

On the supply side, global production saw a modest increase of 80 kb/d in August, reaching 103.5 mb/d. However, this was offset by political disputes and maintenance-related outages in Libya, Norway, and Kazakhstan. Higher outputs from countries like Guyana and Brazil balanced these disruptions. Non-OPEC+ countries are projected to drive supply gains, increasing by 1.5 mb/d in 2024 and 2025, while OPEC+ production is expected to fall by 810 kb/d in 2024 due to voluntary cuts but may recover by 540 kb/d in 2025 if these cuts persist. Despite these fluctuations in supply, the overall trend suggests that oil markets are grappling with oversupply fears, exacerbated by weak Chinese demand and economic challenges, which have led to significant drops in oil prices in past few weeks.

Technical Rebound in Oil Market

The updated monthly chart below was discussed in the previous article. The chart shows that the oil market attempted to break out of the symmetrical triangle but has not yet closed below $72 in September. As previously mentioned, a monthly close below $72 would likely trigger a strong decline, similar to the one seen in 2014 and 2015. The RSI, which is below the midline, also suggests a potential drop.

However, strong price fluctuations, driven by the first-rate cuts in four years and heightened volatility in the US dollar before the November election, have created uncertainty in the commodities market. The Brent crude oil market is attempting to reject a close below $72, rebounding strongly and aiming to close within the symmetrical broadening wedge. The monthly chart indicates that a close above $78 on Brent crude oil in September would form a bullish hammer on the long-term chart, potentially initiating another strong rally toward $85.

This rebound in the oil market is expected, as seen on the daily chart. The price is bouncing off the pivotal support around the $68 region, which is defined by the intersection of the blue and red trend lines. These lines together form a falling wedge pattern, which is a strongly bullish signal if Brent crude oil breaks above $85. Additionally, this support is confirmed by the RSI on the daily chart, which supports higher oil prices in the short term.

The short-term price behavior in Brent crude oil is also observed using the short-term chart, which shows that the rebound from the long-term pivot at $68 has formed an inverted head-and-shoulders pattern, a bullish signal indicating a potential rally in the near term. However, this rally may face resistance around the blue and red lines at $76 and $81, respectively.

Conclusion

In conclusion, Brent crude oil has experienced a robust recovery, driven by favorable economic developments, including the Federal Reserve’s interest rate cuts and heightened geopolitical tensions in the Middle East. The weakening US Dollar has made oil more accessible to global buyers, further boosting prices. However, concerns over weakening global demand, particularly from China, and potential supply disruptions due to regional conflicts continue to influence market dynamics.

From a technical perspective, the oil market is attempting to close above $72, as a close below this key level could trigger a significant drop. However, this outcome depends on the market’s performance at the end of September. A strong decline may follow if the oil market fails to close above $72 in September. The uncertainty surrounding the US dollar due to the upcoming election may further drive market volatility and risk.