• Sun. Jul 14th, 2024

Oil Is Expected to Finish in the Green as Tensions in the Middle East Continue to Rise

Leon Kramer

ByLeon Kramer

Jan 15, 2024

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  • WTI Oil surges past $74 following coordinated military actions by the US and UK against Houthi forces in Yemen. 
  • The situation in the region becomes more tense as additional escalated issues from the Houthi opposite are verified.
  • The DXY US Dollar Index remains above 102, despite the release of a strong inflation report and statements from Fed members that have tempered expectations for rate cuts in March. 

The prices of Oil are soaring following the occurrence of 60 airstrikes launched by Britain and the US toward Houthi forces in Yemen. The strikes represent the subsequent development in the ongoing narrative surrounding the Red Sea, where Houthi rebels from Yemen have targeted and assaulted various vessels and cargo ships throughout December.

While numerous major freight shipping companies are opting for the extended route around Africa, the United States and the United Kingdom have collaborated to establish a task force aimed at reestablishing secure navigation in the Red Sea. These strategic actions are intended to establish a fresh and safe route. 

Meanwhile, the DXY US Dollar Index continues to experience selling pressure. US Dollar bulls struggle to find support from a more robust inflation report, favorable labor market conditions, or any resistance from Fed officials against rate cuts in March.

An important question currently being discussed is what factors could potentially drive an increase in the US Dollar Index, considering that limited options are remaining. The Producer Price Index is scheduled for this Friday. 

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At the time of writing, the price of Crude Oil (WTI) stands at $74.15 per barrel, while Brent Oil is trading at $79.37 per barrel. 

The Market Price in the Risk Premium

  • Iran released a statement expressing concern that the acts of violence carried out by the UK and US could potentially exacerbate insecurity in the region. 
  • During the night, a joint UK and US task force conducted missile attacks on Houthi rebel positions throughout Yemen.
  • Over the past few weeks, the options markets have been lacking in optimism regarding Oil, as sellers now find themselves at risk of a sudden surge in demand due to heightened geopolitical tensions.
  • Given the escalating conflicts in the Middle East and the Red Sea, there is a possibility of decreased passage in the region, which could lead to a significant increase in shipping fees. This will contribute to the rise in inflation. 
  • According to a report by Reuters, China has witnessed a significant surge in its oil imports in 2023, with a remarkable increase of more than 11% compared to the previous year.

What to Keep an Eye on Next Week

The recent surge in oil prices has proven to be quite detrimental for short sellers who have accumulated a significant position in the market. Ever since the autumn of 2023, the price of Oil has been plummeting, causing short sellers to increase their short positions eagerly.

As the UK and US engage in military operations against Houthi rebels in Yemen, the geopolitical landscape is poised to become more volatile. This could lead to increased tensions involving Iran and other Middle Eastern nations, thereby raising concerns about global oil supply. 

Fortunately, the barrier at $74 is being surpassed, which creates ample opportunity for Oil to make significant upward progress. Although a considerable amount, $80 becomes a factor if tensions continue to escalate. After surpassing the $80 mark, the next target on the upside would be $84, provided that Oil manages to sustain a few consecutive daily closes above $80. 

If the price falls below $74, it could reach the $67 level, which has previously acted as a support in June. If the triple bottom is breached, there is a possibility of getting a new low for 2023 at $64.35, which corresponds to the lows of May and March. This level can be seen as the final line of defense. Although still quite a distance away, $57.45 could be an essential level to monitor in the event of a significant price decline.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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