Oil price: what’s the outlook as US and Iran clash in the Gulf?

Those expecting a bounce in oil prices on news of the tanker attacks last week were disappointed. While the price is holding recent lows, the outlook does not seem bullish for oil.

In years past, attacks on oil tankers in the Persian Gulf would result in a significant spike in oil prices. But the recent attacks on two tankers in the Middle East have been greeted with only a modest bounce in prices, one that did not last much beyond the 24 hours after the news struck.

These attacks do raise the risk of a conflict between the US and Iran, and arguably some in Washington are looking for a spark that can provide a rationale for action. But for oil prices, the effect has been muted at best.

Crucially, oil supply continues to rise. US production of shale has increased by around five million barrels per day over the past four years, almost irrespective of the changes in the price of oil. Meanwhile, the cost of new investment in oil continues to fall, keeping the cost of new projects down. Oil producing countries such as Saudi Arabia are having to maintain output in order to bolster their national revenues. As a result, when disruptions in places like Iran and Venezuela occur, there is plenty of supply ready to step into the breach and close the gap.

Only a sustained conflict in the Middle East, or very deep cuts by key producers such as Saudi Arabia, would be likely to really change the overall narrative with regard to rising supply.

Perhaps the bigger risk oil prices is not the prospect of war in the Middle East, but that of peace. Such a development would see Iranian oil return to the market, putting further downward pressure on prices. Other producers will be in no rush to cut their own production and thus sacrifice revenues, so the supply situation can only move further into glut territory.

Unlike Iran, Venezuela will have to spend time restoring output. Iran, on the other hand, can return to full production relatively quickly. This helps to explain why last week’s news did not provoke a substantial rally in oil prices.

From a chart perspective, WTI has bottomed out for now around $52.00, but in the process has merely established a lower low. Back in the first months of 2019, $52.00 provided strong support, but unless there is a significant boost to demand, or a large cut in supply, fundamental pressures may result in a move below $51.00, opening the way to $42.50 and the lows of December 2019.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Trade on commodities

Trade commodity futures, as well as 27 commodity markets with no fixed expiries.1

  • Wide range of popular and niche metals, energies and softs
  • Spreads from 0.3 pts on Spot Gold, 2 pts on Spot Silver and 2.8 pts on Oil
  • View continuous charting, backdated for up to five years

1In the case of all DFBs, there is a fixed expiry at some point in the future.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sell
Buy
Updated
Change

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
China 300
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.