Crude oil prices set for a second weekly decline as the war premium stemming from the conflict in the Middle East continued to lose its hold over traders.
Looking at the daily chart, the break below the ichimoku cloud is significant and it raises the odds of a bigger drop to $80-$82 level (the red area marked in the chart).
In addition to the lower war premium due to continued containment of the Israel-Hamas war, prices were affected by the latest economic data from China, which showed an unexpected contraction in manufacturing activity in October, sparking once again questions about oil demand.
“Oil prices have managed to ride on the improved risk environment higher, as markets continue to bask in the hopes that the Fed is likely done with its rate hiking process,” Reuters quoted IG market strategist Yeap Jun Rong as saying.
“The fact that Israel’s ground invasion of Gaza has commenced without expanding the Israel?Hamas war has given hope that disruptions to oil supply and trade can be avoided,” Commonwealth Bank of Australia analyst Vivek Dhar said in a note, quoted by Bloomberg.
Dhar added, however, that “any direct involvement of Iran in the Israel?Hamas war will initially take Brent oil futures to $100 a barrel.”
Earlier this week, ING analysts estimated that should the U.S. tighten sanctions on Iran, global markets could lose between half a million and a million barrels in daily supply. They went on to add, however, that the risk of supply disruptions remained limited for the time being.
In this context, the upside potential for prices remains limited. Analysts expect Saudi Arabia to extend its voluntary production cuts into December, as previously suggested by the Saudis, so the supply curb has already been factored in. With the war premium down, so is the chance of prices spiking, bar any equally sudden escalation between Israel and Hamas.
A potentially bigger worry for oil prices is diesel fuel supply, which has been tight for a year now. The only reason the market has not swung into a shortage yet is weak economic growth in key markets such as Europe and the U.S.