Crude oil forecast: What now after oil’s sharp reversal?

Crude oil prices staged a dramatic reversal on Monday, triggering a relief rally across global risk assets. Today, European equities pushed further higher and the euro strengthened against the dollar after energy markets cooled sharply from their recent highs. The move followed comments from US President Donald Trump suggesting that the conflict involving Iran could end sooner than markets had feared. But while traders welcomed the sudden drop in oil prices, the geopolitical backdrop remains far from stable, leaving markets vulnerable to further volatility. Against this backdrop, our near-term crude oil forecast remains cautious. We could yet see more volatility as Iran vows to fight.

 

 

Analysis: TACO Trade wins again – for now anyway

 

The so-called TACO Trade (Trump Always Chickens Out) has been one of traders' favourite playbooks during Trump’s second term in office. After warning of severe tariffs on countries, he’d eventually back down and settle for something a lot less taxing. That helped traders buy that big dip in equity markets after the announcement of tariffs last April, and every other dip related to trade since. Traders have used the same logic, it appears, this time with shorting the spike in crude oil, and buying stocks after the sizeable drop. The US president is well aware of the broader economic consequences of the energy shock. Elevated oil prices risk feeding into global inflation and weakening already fragile economic momentum. Clearly, this is something he would like to avoid and explains why we have seen the sharp reversal in risk.

 

While things have calmed down, ultimately, the biggest factor for markets will be whether energy supplies from the region resume normally. Until traders see confirmation that shipping through the Strait of Hormuz has stabilised and production is returning, oil prices are unlikely to retreat dramatically from current levels.

 

Oil prices retreat after war fears spike

 

At the start of the week, crude prices surged on fears that conflict in the Middle East could severely disrupt global energy supplies, sending Brent crude briefly near $120 a barrel as traders priced in the possibility of prolonged supply disruptions across the region. However, sentiment shifted quickly after Trump signalled that hostilities might be nearing an end. Oil subsequently dropped sharply, briefly sliding below $83 before stabilising closer to $90 at the time of writing.

 

Also helping the reversal were reports that the G7 could coordinate a large release from strategic oil reserves in an attempt to stabilise prices. While such a move would offer some short-term relief, it would only partially offset supply disruptions if Middle Eastern production remained offline. That helps explain why markets reacted far more strongly to the political signalling from Washington than to discussions around emergency reserves.

 

Several potential measures are now also being discussed, including waiving certain oil sanctions, easing restrictions on some producers, or even suspending federal fuel duties in the US. There is also speculation that authorities could intervene in oil futures markets if volatility remains extreme.

 

Crude oil forecast: Middle East situation is far from calm

 

Still, the situation remains fragile. Trump warned Iran against attempting to block the Strait of Hormuz, one of the world’s most critical shipping routes for energy supplies. Any disruption to flows through the strait would have major consequences for global oil markets.

 

Iran’s Islamic Revolutionary Guard Corps responded with its own warning, suggesting it could prevent oil exports from the region entirely. That kind of rhetoric highlights just how quickly the situation could escalate again.

 

So, the geopolitical risk premium may have eased, but it certainly hasn’t disappeared. Against this backdrop, the crude oil forecast remains highly sensitive to headlines and could yet move sharply higher again. Don’t take anything for granted.

 

 

The $90 level looks to be acting as a bit of a pivot. Let’s see if prices will now stabilise around this level, and we go back towards the $100 mark in the coming hours, or whether prices ease further low. Any move northwards should be bad for risk assets.

 

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R