Crude oil extends gains as Saudi-Houthi conflict and concerns of US-Iran attacks keep the market supported

What happened

Crude oil is extending its gains, buoyed by a backdrop of escalating tensions in the Middle East. Reports indicate that the US and Israeli militaries have developed plans for renewed strikes on Iran, with additional forces expected to be fully deployed by early November, following the US midterm elections. Concurrently, the Saudi-Houthi conflict persists, with recent Houthi attacks targeting Saudi airports and energy infrastructure, including an incident near Dammam that resulted in casualties. Saudi Aramco has instructed staff to evacuate its Dhahran headquarters and work remotely due to the security incidents. Tensions in the Strait of Hormuz have also intensified after Iran stated in early October that it would close what it termed illegal routes used by the US to escort vessels through the strait. The IRGC claimed to have attacked vessels and that others struck naval mines, asserting that illicit vessel traffic in Hormuz has ceased following continued attacks.

Why it matters

Geopolitical instability in the Middle East is a critical factor in oil pricing, given the region's significance to global supply. The prospect of further US attacks on Iran and the ongoing Saudi-Houthi confrontations are adding a risk premium to the market, driving up oil prices. Any disruption to shipping lanes or attacks on energy infrastructure could significantly impact supply, leading to volatility and inflationary pressures.

Market impact

Commodities: Crude oil is likely to continue its upward trend, supported by geopolitical tensions and the associated risk premium. Technical analysis suggests that despite potential pullbacks, the bullish momentum is expected to persist, with key resistance levels to watch. Continued attacks and a lack of de-escalation or successful negotiations could lead to further price increases.

What to watch

Investors should closely monitor developments in the Middle East, including any signs of de-escalation or escalation in the Saudi-Houthi conflict and US-Iran relations. The release of US Flash PMI data will also be relevant, though the primary focus remains on geopolitical issues. Progress in diplomatic negotiations or confirmation of further attacks could significantly influence oil prices.

Scenarios

Base Case: Continued rise in crude oil prices, driven by geopolitical tensions and the risk premium. Risk Case: An abrupt de-escalation in conflicts or a surprising breakthrough in US-Iran negotiations could lead to a correction in oil prices.

Original source: ForexLive (InvestingLive). For information only, not investment advice.