Brent crude has delivered an interesting message this week. Prices briefly climbed to USD 87.55 as fighting between the United States and Iran intensified, yet the rally quickly lost momentum even as military operations continued across the Middle East. The hesitation should not be mistaken for complacency. Rather, it reflects a market that sees the conflict becoming more dangerous but is still waiting for the event that would fundamentally alter the outlook for global oil supply. Until then, the USD 89-90 region is likely to remain formidable resistance.
There are two reasons why the rally has stalled.
The first is that escalation and partial retreat are unfolding simultaneously—and from the same actor. The United States has expanded its military campaign for a fifth straight day, targeting Iranian missile sites and coastal defences while maintaining a naval blockade of Iranian ports. At the same time, however, Washington abandoned its proposed 20% Hormuz shipping fee after legal objections from the International Maritime Organization and strong opposition from the shipping industry. The military conflict has intensified, but one of the week’s most disruptive commercial measures has quietly been removed. Those mixed signals have left traders reluctant to push prices aggressively higher.
The second reason is that traders appear to be waiting for a much higher threshold before pricing another sustained leg higher in oil. Military strikes on missile batteries, coastal defences and naval assets have so far had only a limited direct impact on oil production or exports. What the market is watching instead is whether the conflict expands into infrastructure that directly underpins global energy supply. US President Donald Trump may already have identified that trigger by warning that unless Tehran returns to negotiations, the United States could strike Iranian power plants, bridges and ultimately energy infrastructure next week. Such attacks would represent a fundamentally different category of escalation. On the other side, Iranian parliamentary speaker Mohammad Baqer Qalibaf declared the country was engaged in an “existential war” with the United States, argued Iran’s security depends on controlling the Strait of Hormuz, and suggested Tehran has little reason to continue adhering to last month’s memorandum of understanding. Those developments keep the risk of broader disruption to Gulf energy exports firmly alive.
If such an escalation occurs, the market may prove far more sensitive than earlier this year. IMF economists Azim Sadikov and Jean-Marc Natal warned this week that the global oil market’s spare production capacity has been meaningfully depleted after months of increased output, inventory drawdowns and demand adjustment. Their assessment is that the world will enter the next supply shock from a much weaker position than it did in March. In other words, while Brent has struggled to extend gains above USD 87 this week, the market’s ability to absorb a genuinely new disruption has become increasingly limited.
That backdrop leaves Brent at an important technical inflection point. The bounce from 70.14 short term bottom is, for now, seen as a corrective move only. While further rise cannot be ruled out, upside should be limited by 38.2% retracement of 119.50 to 70.14 at 89.00. Break of 80.59 resistance turned support will argue that the rebound has completed.
However, decisive break of 89.00 will raise the chance that it’s actually reversing whole fall from 119.50 to 70.14. That would set up further rise to 61.8% retracement at 100.64, and possibly above.
