Oil, FTSE 100: Two trades to watch

Oil jumps as Middle East conflict fuels supply worries

Oil prices are rising on Monday and could remain elevated for the coming days as the market assesses the impact of the escalating Middle East conflict on supplies through the Strait of Hormuz.

This is a key oil checkpoint, with more than 20% of global supply passing through it. Vessels are building up around the Strait after Iran warned Vessels not to pass through, and as insurance firms struggle to reprice.

Should tensions remain, WTI could rise towards $80.00, or even $90.00, a barrel in the coming week, much of this made up by the risk premium surrounding oil supply.

Any sense of de-escalation in the region could bring oil prices back towards $70 a barrel. Any signs of Iran allowing passage through the Strait of Hormuz could reduce the risk premium and ease oil prices further.

These latest developments came after an OPEC+ meeting over the weekend, where they agreed to an increase of 206,000 barrels per day starting in April. However, given the geopolitical developments, these changes may take some time to be felt.

Oil forecast – technical analysis

On the daily chart, oil has broken out above its rising channel, within which it has traded since the start of the year and above its falling trendline dating back to 2022. The breakout, combined with price trading above its 20, 50, and 100 SMA, confirms the bullish trend, with buyers targeting 75.00 and 80.00.

However, the RSI is very overbought, so there could be some price consolidation.

Support is seen at 70.00 region, the round number and 69.00, the daily low. Below here, 66.00 comes back into focus.

FTSE falls 1% in risk-off trade

The FTSE 100, along with European equities, is falling lower in risk-off trade as the market reacts to the conflict in Iran. US futures also point to a weaker start.

The US and Israel launched a series of attacks on Iran, and Tehran retaliated, hitting US bases in neighbouring countries across the Middle East. Oil prices skyrocketed amid concerns over supply across the Strait of Hormuz, sparking inflation worries.

Banks and airliners are falling sharply, whilst energy stocks and the defence sector are finding support. Shell has risen over 2% whilst BAE Systems is up almost 5%.

If the issue persists, the market will start to worry about new inflationary pressures from higher oil prices, which could lower expectations surrounding rate cuts. British government bond yields are rising as investors have revised their expectations for the BoE rate cut, with just a 74% chance that the BOE will cut rates later this month, down from 78% last week.

The market will stay focused on developments in the Middle East, trying to gauge how long the Iran war could last and whether oil will pass through the Strait of Hormuz. These are the key questions affecting oil prices and, therefore, the inflation outlook.

FTSE forecast – technical analysis

The FTSE extended its gains from its April low to a record high of 10,940 on Friday before falling lower today. The uptrend remains intact, and the RSI is coming out of overbought territory.

Minor support is at 10,650, last week’s low, and 10,500, the rising trendline and 20 SMA support. A break below here exposes the 50 SMA at 10,250. It would take a break below 10,100, the February low, to negate the near-term uptrend.

On the upside, buyer will aim for 10,000 and new record highs.