Head of Commodity Strategy
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Key points:
Expect continued volatility in crude oil markets, with Brent in a month's time potentially trading back below USD 70 or above USD 90, depending on which actions Iran chooses to take. Crude oil prices have rebounded strongly this month, initially buoyed by seasonal summer demand tightening an otherwise well-supplied market. This helped offset bearish factors, such as rising OPEC+ output and macroeconomic uncertainties caused by Trump's trade war. What began as a steady recovery—partly fuelled by short covering—turned increasingly volatile in the past couple of weeks when Brent crude, the global crude benchmark, spiked after Israel launched a prolonged series of airstrikes on Iranian nuclear and ballistic facilities. This development reduced the chance of a negotiated solution between the US and Iran. Talks had centred almost exclusively on Iran's rapidly advancing nuclear programme, with the core objective of limiting its nuclear activities—particularly uranium enrichment—in exchange for relief from US-imposed economic sanctions. Hopes of a diplomatic resolution all but died at the weekend after US President Trump announced the initiation of "Operation Midnight Hammer," which included targeted attacks on Iran's nuclear sites at Fordow, Natanz, and Isfahan. He cautioned that additional targets are still under consideration, stressing that while the US does not seek regime change, it is prepared to conduct more extensive strikes if Iran does not pursue diplomatic engagement. From an oil and natural gas market perspective, all eyes remain on the Strait of Hormuz—through which roughly a fifth of global crude supply flows—and whether Iran will seek to disrupt tanker traffic. While I have long held the view that strategic considerations—particularly toward Iran-friendly Qatar and its vital LNG exports—and Iran's dependence on China, its largest oil customer, would act as a restraining force, this remains true only as long as Iran's own oil export facilities are not targeted.
In addition, the main shipping canal through the Strait of Hormuz currently operates entirely within Omani territorial waters, as vessels actively avoid Iranian waters. Meanwhile, the Gulf Corporation Council (GCC), which includes Saudi Arabia, UAE, Kuwait, Qatar, and Oman, has a mutual defence agreement that treats an attack on one member as an attack on all, though its implementation lacks NATO's automatic response mechanisms.
However, even without a full-scale disruption, the mere threat of interference in the strait could delay shipments and trigger a sharper-than-expected short-term spike in prices, before easing amid a potential release of strategic reserves, especially in the US and China, and a redirection of parts of Saudi and UAE crude oil exports via pipelines to facilities outside the strait.
Brent crude briefly traded above USD 80 per barrel when markets opened on Monday morning, only to suffer another setback, with sellers emerging ahead of key resistance around USD 82.50. Helping to explain why crude did not respond more forcefully to a disruption threat—which, if realised, could send prices towards USD 100 per barrel—is the fact that prices were already elevated ahead of the attack, with traders having positioned themselves for additional upside risks that were then unwound on Monday.
It is also worth noting that the current geopolitical risk premium—which, above USD 80, exceeds USD 10 per barrel—cannot be sustained for long without a tangible supply disruption. Absent that, price gains may struggle to hold, but the stage is nonetheless set for another volatile week across the energy complex.
Another important driver behind any given move in crude oil futures is the activity of speculators who seek to benefit from price movements in both directions. With the latest spike coming after a period of price weakness, it is no surprise that hedge funds held a negative bias on crude, which they were forced to reduce as prices started to rally, thereby adding further upside momentum via short covering.
In the latest update on speculators' behaviour in the futures market covering the week to 17 June—when Brent crude spiked higher by 14%—the ICE Europe Exchange published data showing a 40% jump in the net long position, with the bulk of the increase driven by short sellers reducing their short positions to a 13-month low. With short covering now all but done, additional buying will primarily have to come from fresh longs willing to pay a 10–15% premium relative to the fundamentally justified price—without disruptions—closer to USD 70 per barrel. Note: The publication of data covering the US futures markets, including WTI, has been delayed from Friday to today following last week’s Juneteenth government holiday.
All developments point to continued volatility in the crude oil market, with the price of Brent in a month's time potentially trading back below USD 70 or above USD 90, depending on which actions Iran chooses to take.
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