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.

Oil Source: Bloomberg

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.

Oil chart

Oil chart


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