Oil News: Is a Supply Shock Imminent as Middle East Tensions Escalate?

Weekly Crude Oil Recap: Key Drivers and Price Outlook

Crude oil prices closed last week with a 4.5% gain, ending at $71.78, as heightened geopolitical risks, a stronger U.S. dollar, and weak demand indicators from China shaped market sentiment. The market’s movement reflects a tug-of-war between potential Middle Eastern supply risks and bearish factors such as rising U.S. crude inventories and sluggish Chinese demand.

Geopolitical Tensions Support Oil Prices

Geopolitical instability stemming from the escalating Israel-Iran conflict provided significant support to crude prices. Following an October 1 missile strike from Iran, Israel conducted retaliatory airstrikes targeting Iranian military sites, which raised alarms in the oil market over potential regional spillover. Although oil infrastructure was spared, the risk of conflict disrupting supply routes through critical areas like the Strait of Hormuz remains. Analysts view any escalation here as potentially significant for global oil supply, supporting a premium on crude prices despite underlying bearish indicators​​.

China’s Weak Demand Signals a Slowdown

China’s oil demand outlook continues to weigh heavily on the market. Reports last week revealed a sixth consecutive monthly decline in refinery throughput, with imports down 0.6%, marking a persistent demand contraction. China’s refinery slowdown has left a surplus of nearly 1 million barrels per day in recent months. With Chinese imports underperforming year-on-year, the market questions whether OPEC’s 2024 demand forecast of a 580,000 bpd increase is achievable. Traders are cautious, as a prolonged period of weak demand from the world’s top importer could further dampen global oil demand expectations​​.

U.S. Supply Growth and Dollar Strength Add Bearish Pressure

Rising U.S. crude production also added pressure to prices, with weekly inventories rising by a substantial 5.5 million barrels. This increase, far above expectations, was driven by higher imports and post-maintenance refinery activity. The strength of the U.S. dollar, buoyed by safe-haven demand amid geopolitical tensions, added to the bearish case. The dollar’s appreciation typically dampens international demand for crude, as it becomes more costly for holders of other currencies​​.

Weekly Technical Analysis Shows Rangebound Market

From a weekly technical perspective, crude oil futures remain rangebound between the long-term retracement levels of $69.21 and $71.63. The market’s close at the upper side of this retracement zone suggests bullish momentum but remains capped below the next key resistance at $74.51. Traders will be watching if prices can break above this level, which could signal a stronger bullish trend, or if prices fall below $69.21, risking a sharper pullback toward $63.46​.

Outlook: Cautiously Bullish with Resistance Ahead

In the coming week, crude oil prices may continue to exhibit a cautiously bullish trend, supported by geopolitical risks. A sustained breakout above the weekly resistance at $71.78 would confirm this bias, opening potential for higher targets like $74.51. However, if U.S. inventory builds persist and China’s demand remains sluggish, prices may remain rangebound or test lower support levels near $69.21. This is a potential trigger point for an acceleration to the downside.

Traders should watch for geopolitical developments as primary drivers, while technical indicators suggest a balanced but slightly bullish outlook constrained by resistance above.