Markets Shrug Off Tensions After NATO Meeting

Crude prices spiked but are normalising as markets generally look past the situation in the Strait of Hormuz, focusing instead on renewed interest in AI trade and economic data.

The Latest Developments Driving the Market

• Brent spiked over $80 this week as shipping through the Strait of Hormuz was essentially halted amid renewed strikes between Iran and the US.
• Markets appear to be pricing in a high likelihood that the strikes will end when negotiations resume on Friday or over the weekend.
• Analysts have returned to predicting a crude shortfall this year if the Strait is not permanently reopened, which could push crude prices higher if market hopes for the weekend are not realised.

Will the Ceasefire Resume?

Markets are largely shrugging off the latest flare-up in tensions between the US and Iran and even largely ignoring US President Donald Trump's implication that the ceasefire is "over". Although both sides traded attacks, neither has officially said that the deal is over. Negotiations are set to resume on Friday after a pause for the funeral of former Iranian Supreme Leader Ali Khamenei, which ended on Thursday and contained prominent anti-American rhetoric. The main issue for markets is that oil shipments through the Strait have nearly halted as shippers assess the situation. But this isn't the first time there has been a flare-up lasting a few days before negotiations resume, and markets may expect that to happen again. Iran has already tried to assert control over the Strait by firing on ships sailing close to Oman, leading to temporary US reprisals. Some analysts speculate that the incident is the result of internal divisions within the Iranian regime, with hardliners pushing for greater control over oil shipments, contrary to moderates who lead the negotiations. It's notable that the recent strikes occurred during Khamenei's funeral, which was supposed to be a period of calm.

Brent has already fallen below $80 per barrel, where it initially spiked amid the resumption of tensions. While crude prices are sensitive to the situation in the Strait, the broader market has taken the news in stride. Equities are already higher amid a resurgence in the AI trade, as US traders shift their focus away from geopolitics towards the upcoming earnings season and the SK Hynix IPO. European markets are more cautious, even though they are slightly higher on Friday, with the outcome of the NATO meeting expected to have a bigger impact. Trump gave mixed signals as he met European leaders, first listing a series of grievances and renewing his interest in Greenland. But after personally meeting with European leaders behind closed doors, the meeting came out with what analysts say is a "win" for NATO, as Trump gave positive comments and affirmed commitments to Article 5. While the agreement helped shore up the alliance with regard to Russia, the meeting did not culminate in any increased support for US efforts against Iran.

Analysts Unsure About Crude Outlook

The MOU that had given markets hope that the energy market would normalise has been unravelling as the US reinstates sanctions on Iran. Although the deal is not officially dead, analysts are reassessing their outlook for the crude market. Notably, UBS has done a U-turn on its forecast, now warning of a supply crunch after predicting a surplus just last week. The investment bank notes that Gulf production is over 10 million barrels per day below pre-war levels and that a significant portion of the gap is being covered by drawing down inventories. Crude prices could rise if markets become concerned about supplies. For now, the focus seems to be on hopes that US-Iran negotiations will resume on Friday and, like last time, that the talks will end the current round of tit-for-tat strikes.

Brent’s 15% Rally at Risk of Consolidation

Brent’s price action suggests a potential consolidation after rising as much as 15% above $80 since bottoming out at $70. With the VWAP lines starting to flatten out and Brent at the top of a potential range, if the medium VWAP fails to hold recent bearish pressure, the crude oil could revisit the lower end of the sideways market, exposing $69. However, if bulls persist, the local support at $75 could help boost prices past $81, opening the door to the next swings sitting at $83.50 and $88.

Source: SpreadEx | Brent Crude