Oil surges as Iran strikes Israel, are we headed for unprecedented highs?

Oil prices saw a rebound on Wednesday after Iran fired 180 missiles towards Israel on Tuesday, in Iran’s latest offensive as tensions in the Middle East escalate. The growing fear of potential retaliatory strikes and a broader regional conflict has raised concerns about significant disruptions to the global oil supply, causing oil prices to spike.

In previous conflicts, such as those involving Israel and Hamas, oil prices remained relatively stable because neither side was a major oil producer. However, the situation is markedly different this time, with Iran directly involved. As the ninth-largest oil producer in the world, accounting for roughly 4% of global output, any disruptions in Iranian oil production could have substantial consequences for the global market.

It's important to note that Iran plays a critical role in the global oil market. Historically, geopolitical events involving Iran have triggered notable shifts in oil prices. For example, the nationalization of Iran's oil industry in the 1950s, the Iranian revolution in the 1970s, and the Iran-Iraq war of the 1980s all resulted in significant price increases. The scale of Israel’s potential retaliation to this latest escalation could have a similar impact, pushing oil prices higher if Iranian production is threatened.

Historically, geopolitical static has led to volatility in global oil prices, and analysts will be on the lookout for similar patterns.

Source: Haver, Caldara and Iacoviello (2022), and ECB staff calculations.

While the current geopolitical tensions could disrupt supply, several other factors are influencing oil prices. Earlier this year, prices were kept in check by a weaker global economy, particularly in the U.S. and China, which reduced demand for fuel. Additionally, U.S. crude oil production reached record highs, helping to offset some supply concerns.

However, the tightening of global oil markets has been exacerbated by recent events, such as the shutdown of Libya's El-Feel oil field in August. These supply challenges, combined with the growing tensions in the Middle East, are contributing to higher oil prices and creating uncertainty in the market.

OPEC+ and the path forward

The recent developments in the Middle East are likely to be a major topic at the upcoming OPEC+ meeting, where oil-producing nations will review their current strategies. OPEC+ has committed to ensuring market stability but faces challenges in balancing production levels in light of these geopolitical tensions.

The group had already planned to raise output by 180,000 barrels per day monthly starting in December, but any further escalation in the Middle East could prompt a reassessment of this strategy. The potential for supply disruptions, coupled with OPEC+'s production policies, will be key factors driving oil prices in the near future.

Oil technical outlook: Could US Oil rebound to highs of $75?

Higher oil prices typically translate into higher fuel costs, which can increase inflation and put pressure on the global economy. As oil prices rise, transportation costs grow, and industries that rely on fuel are likely to face increased operational expenses. 

With oil prices already rising sharply due to the conflict, global markets are closely watching how the situation unfolds. If the conflict escalates further, and key oil supplies are disrupted, it could lead to sustained price increases, compounding inflationary pressures and challenging central banks’ efforts to stabilize economies.

At the time of writing, US Oil is rebounding from last week’s lows of $67 to hover around highs of $71. The daily chart still shows some bearish bias with prices still below the 100-day moving average, however RSI is edging up sharply towards 60 - hinting at strong upward momentum.

Buyers could face a hurdle around the $72 psychological resistance level, with a further up move likely to face a hurdle around the 100-day moving average at $73.52. On the downside, a price slump could see prices held at $70, with a further move down likely holding at last week’s lows of $68.

Source: Deriv MT5