Oil Prices Forecast: Volatility Surges with Supply Fears, China Demand Worries

Key Points

• Middle East tensions trigger oil price recovery.
• China’s real estate crisis dampens global oil demand.
• Potential U.S.-Iran standoff may escalate oil prices.

Oil Market Rebounds

Brent and West Texas Intermediate crude oil prices are rebounding early Tuesday, recovering from a more than 1% decline on Monday. This resurgence is largely attributed to growing geopolitical tensions in the Middle East, sparking apprehensions about potential supply disruptions.

At 07:33 GMT, Light Crude Oil Futures are trading $76.97, up $0.19 or +0.25%.

Impact of Geopolitical Risks

The escalating conflict in the Middle East, particularly the drone attack in Jordan by Iran-backed militants, has put the markets on high alert. This tension, coupled with Washington’s promise to defend its troops, could significantly impact oil supply if U.S.-Iran relations deteriorate further.

Supply and Demand Outlook

The oil market is also contending with demand concerns from China, the world’s largest crude consumer. The deepening real estate crisis, marked by the liquidation of China Evergrande Group, has dampened investor confidence, affecting oil prices. However, the supply side is bolstered by potential reductions in Russian naphtha exports due to refinery disruptions, which could tighten global supply.

Short-Term Market Forecast

Looking ahead, the market remains sensitive to geopolitical developments and demand signals from China. If U.S.-Iran tensions escalate, we might see oil prices sustaining in the $80-$100 per barrel range.

Conversely, a resolution or de-escalation could lead to a reduction in the current risk premium, aligning prices more closely with actual demand fundamentals.

Investors are advised to closely monitor upcoming U.S. stockpile data from the API and EIA, on Tuesday and Wednesday, respectively, for further market direction.

Technical Analysis

Light crude oil futures are attempting to rebound on Tuesday after posting a dramatic closing price reversal top the previous session. This type of chart pattern often signals the end of a rally. If confirmed by follow-through selling pressure today, it could lead to the start of a 2 to 3 day correction.

A trade to the weak side of the 200-day moving average at $76.47 will also signal renewed selling pressure. This could lead to a near-term test of the 50-day moving average at $72.66.

On the upside, holding the 200-day MA will signal the presence of strong buyers, defending the trend. Meanwhile, a sustained move over the pivot at $77.43 will indicate the buying is getting stronger. If volume rise substantially on this move then look for a near-term surge into the resistance at $82.68.