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Will Israel respond to Iran’s first attack on its territory? It was widely expected, so asset managers decided to sell Brent on the facts. The damage was insignificant. However, will it stop Jerusalem from retaliating? Let us discuss this topic and make up a trading plan for Brent.
Monthly oil fundamental forecast
The ancient Greeks believed that revenge could be endless, as acts of retaliation beget new acts of retaliation. Will Israel retaliate for Iran’s air strikes? The market thinks it will not, as Brent has never managed to stay above $92 a barrel. The benchmark sold off on the facts of a widely expected attack by Tehran. Notably, the first one in history. Iran usually prefers to act using its proxies. This time, the country decided to act, rolling up its sleeves.
“Buy the rumor, sell the news,” one famous market strategy reads. Instead of soaring in response to the launch of more than 300 missiles and drones, oil slid below $90 a barrel. Asset managers, who had built up net longs in Brent to the highest level since October 2021 in the week to April 9, opted to take profits on the longs. When everyone is buying, there is an excellent opportunity to sell.
Brent speculative net positions
Source: Bloomberg.
If they used to say that oil prices could change depending on whether the Saudi prince sneezed or not, now it all depends on Israel. Iran has recently increased its production to 3.4 million bpd, and a retaliatory Israeli attack on its infrastructure, coupled with Tehran’s closure of the Strait of Hormuz, raises the possibility of Brent rising above $110 a barrel. Then OPEC+ will indeed get involved. The alliance will be unhappy with high prices that threaten demand and will boost production.
In its latest review, OPEC did not change its demand forecast for oil. The Organization of the Petroleum Exporting Countries still sees increases of 2.2 mln bpd in 2024 and 1.8 mln bpd in 2025. Notably, non-OPEC supply estimates have fallen from +1.1 mln bpd to +1 mln bpd this year and from +1.4 mln bpd to +1.3 mln bpd next year. The oil market remains fundamentally strong, and the strength of Brent’s uptrend will depend on how events in the Middle East unfold.
Judging by the market reaction, investors do not believe the conflict will escalate. Iran has expressed satisfaction with the results of the attack. 99% of the rockets and drones were shot down, and no one in Israel was hurt. The US will surely make a huge diplomatic effort to dissuade Jerusalem from retaliating. Joe Biden does not need rising oil and gasoline prices and accelerating inflation in the United States. Still, the East is a delicate matter. Failure to retaliate for an attack is seen as a sign of weakness. So, any scenario cannot be ruled out.
Monthly Brent trading plan
Good trades are worth holding on to, and the January recommendation to buy Brent at $78.5 a barrel was a good one. If Israel decides to strike back, Brenk will soar above $110, and we will have an excellent opportunity to build up long trades. Can the lack of retaliation be seen as a de-escalation? Geopolitical tensions will remain in any case, coupled with the fundamental strength of the oil market, which is a reason to buy oil on rebounds from supports of $89, $88, and $87.5 per barrel.
Price chart of UKBRENT in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
