It feels like the market sentiment has just been reset in the last 24 hours, which started after the G7 and IEA said that they were going to coordinate a joint release of emergency oil reserves. That adds to the story that the US might be pursuing a hefty SPR release as well. And then you have US president Trump touting that the conflict is making “good progress” in terms of timeline completion and warns Iran against causing further energy disruption in the region.
All of that has been enough to temper the fever in the market, with oil prices dropping from $116 all the way down to a low of $81 overnight. WTI crude oil has since rebounded back to around $90 currently. So, what’s next?
The roller coaster ride continues and it’s all about the headlines. With regards to the IEA reserves release and any US SPR selling, it is going to be at levels we’ve not seen before. Or at least that is the expectation before any actual numbers are confirmed. That would perhaps explain the kind of market reaction we’re seeing.
And even so, that is basically the bare minimum in terms of suppressing oil prices by about $10 to $20 in the meantime. The key word there being suppressing mind you. It’s not a long-term solution.
The only way this all ends is when the Middle East conflict itself normalises and we see the energy disruptions come to a halt. For now, Trump may be saying that Iran has been largely incapacitated but that is not stopping them from continuing to strike at key energy facilities across the Gulf region, or at least attempt to.
In the meantime, the Strait of Hormuz remains in de facto closure as well. So, that is arguably still the biggest factor that is going to provide a floor for oil prices. The main question now is how long will this remain the case for?
Traders were tentative in feeling out the US-Iran conflict last week but slowly pushed oil prices higher upon the realisation that the disruption may go on for weeks or maybe even months. That eventually led to the break of $80 in WTI before the latest run up earlier this week.
Right now, it feels like we’re going back to a similar setup again after the reset yesterday. Traders will be looking to feel out the length and extent of the energy disruption once more. And if it carries on for many more weeks, that will slowly chip away at the attempts by the G7, IEA, and US to try and suppress oil prices in the near-term.
Every passing day will be another piece of the domino falling, until one day it will trigger a cascading effect where traders price out another surge in prices amid the prolonged conflict. It’s basically just moving the goalpost of $80 to a higher level now, perhaps $100 to $110. For now, it is a little early to judge that given what we just saw yesterday.
But in due time, markets will settle and we will get a better sense of where the goalpost has shifted. The hope for the optimists will be that the war ends and/or normalises before we get to the tipping point of setting off the cascading effect in the domino pieces.
This article was written by Justin Low at investinglive.com.
