Oil Traders Continue To Fade Geopolitical Risk But Technicals Reflecting A Potential Short-Term Bounce

The tension in the Red Sea continues to put pressure on shipping routes, which will ultimately be felt in the coming weeks. Over the weekend, a Maersk shipping vessel was attacked just days after the company resumed Red Sea operations. The U.S. military assisted the vessel and repelled additional attacks, but now Maersk has initiated another 48-hour pause on transit to review the security risk within the area. The adjustments in routes will be significant for the shipping industry, as the only other alternative is to go around Africa, which could add up to an additional 30 days to the route. This impacts the "just-in-time" shipping model, which will immediately affect the European and Asian markets and may spill over to the U.S. if the conflict continues this current trajectory.

Energy markets have seen some volatility throughout this conflict, but a massive premium has not yet been seen in the market because Iranian oil moving through the Suez Canal continues to move unimpeded, and global inventory levels continue to rise. The expansion of the conflict will pose a bigger risk to the energy market. If the conflict spills over to the Persian Gulf, that is when we can expect a major disruption in the energy market. Flows coming from the UAE, Qatar, and Kuwait are key for the energy markets, and unfortunately, the Persian Gulf and the Gulf of Oman border Iran. The Suez Canal and the Red Sea see approximately 9.2 million barrels per day of oil flow as of the first half of 2023, according to the EIA. However, the Persian Gulf and the Strait of Hormuz have around 20.5 million barrels per day going through the Strait, and that is the major risk to the energy markets.

Even with the risk, selling pressure remains, and this is coming from Managed Money traders such as CTAs. Speculators continue to short crude oil, which may reflect their lack of confidence in robust economic growth this year, their doubt about a long-lasting conflict, or their concern about inventory levels. Either way, the upside potential seems a little more appropriate due to the risk/reward level, especially when considering the technical levels on crude. The 200-week moving average has been a key area for support, and that is the level crude is currently testing. A break of that key support level would open additional downside pressure, where the $60 level could be the next level to test.

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