Oil is finding itself back at a rather important crossroads. And one that will have implications for broader markets as well.
Brent crude has settled below $100 again after fairly volatile back-and-forth US-Iran headlines since overnight, with the market trying to decide just how much geopolitical risk should still be embedded in prices.
In part, the latest move has been driven by renewed hopes for diplomacy. US president Trump said that talks with Iran were continuing and that he believed a settlement would eventually be reached, even as the rhetoric from Washington remained confrontational. Meanwhile, reports about Iran offering an olive branch of sorts on the Strait of Hormuz has also been met with mixed facts and truths. And that is making the situation tough to read.
But for now, the market is leaning slightly more towards a better supply picture – helped by Saudi Arabia also restarting its East-West pipeline. Brent crude closed below $100 on Tuesday for the first time in two weeks and is now keeping around $98.30 as we look to European trading today.
The oil market has spent much of the past few weeks pricing a risk that physical supply could become considerably tighter, leading to triple-digit prices again. But now, some of that premium is being challenged.
That being said, I wouldn’t necessarily interpret a move below $100 as saying the geopolitical story is over. The more interesting question from here is whether prices can stay below $100.
There is a meaningful difference between oil briefly slipping through a psychological level on encouraging diplomatic headlines and a sustained repricing lower based on improving physical flows.
For the latter, I think the market probably needs clearer evidence of de-escalation, more specifically better passage through the Strait of Hormuz especially.
Without that, every negative US-Iran headline is capable of putting the geopolitical premium straight back into crude. That is something that we have seen play out in the past month already too.
And that is where the rates market also becomes particularly important.
10-year Treasury yields are still keeping around 4.95%, having briefly traded above 5% last week for the first time since 2007. And this is despite oil prices pulling back, highlighting that the pressure on bonds is no longer solely an energy story.
I’m not doubting the fact that lower oil prices would certainly help with the bond market’s predicament.
If Brent starts establishing itself comfortably below $100 and continues towards the low-$90s, one important source of inflation anxiety begins to fade. And that could give the bond market some breathing room.
However, traders are also needing to wrestle with the Fed’s renewed tightening cycle and expectations that rates could remain higher for longer. That not to mention the mountain of fiscal concerns that is still ever present in the background.
The technical picture is also reflecting much of the relative uncertainty from this week, despite prices falling back.
Brent crude has fallen back below $100 and took out the 23.6 Fib retracement level of the swing higher from July to September at around $100.57 as well.
That opens the door for a technical push lower, with some minor support then seen at the 38.2 Fib retracement level at around $94.75 next. But amid a further loss of momentum and breaking below that, it would more decisively bring the $92 area back into focus, where the 100-day moving average (red line) is sitting nearby.
On the upside, prices need to reclaim the $100 mark again first and foremost. And only then, buyers can talk about testing the July swing high near $102 again. Beyond there, $110-$112 remains the larger resistance zone.
Putting everything together, $100 isn’t just a nice round number anymore for the oil market. It is increasingly becoming the dividing line between a market still dominated by geopolitical scarcity fears and one that is beginning to price a more credible path towards improving supply.
For traders, I think that makes the next sustained break above/below more meaningful than any individual headline along the way.
This article was written by Justin Low at investinglive.com.