Brent Higher After US, Iran Fail to Reach Deal

Markets are cautiously optimistic after the setback in efforts to end the conflict in the Middle East, amid signs that the Strait of Hormuz could reopen following the safe passage of US warships.

What's Moving the Market

• Brent back over $100 per barrel after the US and Iran fail to reach a deal, as Iran holds out on its nuclear ambitions.
• Trump announced a blockade of Iranian ports and is reportedly considering resuming strikes in a bid to force concessions from Tehran.
• Markets remain risk-averse, with the dollar higher than on Friday and stocks in the red, but show signs of optimism as the ceasefire holds.

Markets Disappointed But Still Optimistic

European indices opened lower across the board on Monday, with US futures also in the red after the US and Iranian delegations meeting in Pakistan over the weekend failed to agree to end the war. However, neither side shut the door to talks, with the main sticking point, as reported by Pakistani mediators, being Iran's nuclear ambitions. On Sunday, US President Donald Trump announced a blockade of Iranian ports, ordering the US Navy to interdict any vessels paying a toll that Iran demands for safe passage. This would allow ships to transit the Strait through Omani territorial waters without interference from the US. Two US Navy vessels also transited the Strait, with conflicting reports on whether the key transit areas had been mined. The main takeaway for the market seems to be disappointment that a deal was not reached as quickly as hoped. Both sides are still talking despite also threatening to resume hostilities at any moment, while the ceasefire holds, and another meeting between the belligerent parties is expected. Israel also halted attacks on Iran's proxy in Lebanon, Hezbollah, in anticipation of talks later on Monday. The relatively mild shift toward risk aversion suggests markets remain optimistic that a settlement might be reached before the end of the month. Trump's initial ability to prosecute the war without Congressional approval expires after 60 days, or on 29 April.

Brent jumped to $103 per barrel at the open of this week's trading and has remained above $100 since, compared to $94 on Friday. WTI is still priced above Brent by around $1.50, as reports of dozens of empty tankers heading for US coasts come amid the Strait of Hormuz remaining unnavigable. Gold initially dropped below $4,700 per ounce but has been recovering to last week's levels as markets digest the implications of the weekend. Initial risk aversion left the dollar higher during the Asian session, but the index has returned to its Friday levels at the European open. All eyes are on the dwindling supply as millions of barrels of refined fuel are trapped behind the Strait, and airlines warn that jet fuel could run out in a matter of weeks, leaving airline stocks by far the worst performers. Europe imports around 30% of its jet fuel from the Gulf. 

Supply Crunch vs Odds of a Deal

The jump in crude prices reflects trader nervousness that the ceasefire could end without a deal, amid reports that Trump is considering renewing attacks on Iran. However, prices have not risen to the levels seen at the start of the war, as Gulf states have found alternatives to meet demand. Saudi Arabia said its pipeline to the Red Sea is operating at 7 million barrels per day, at maximum capacity. The blockade of Iranian exports could reduce supply, as the country exported around 1.1 million barrels per day even during the war, mostly to China. However, price normalisation depends on whether exports can resume via the Strait of Hormuz, with markets closely monitoring the situation as ships reportedly prepare to test the passage.

Brent Attempts BB Breakout

Brent’s spike in earlier trading faced resistance above the upper Bollinger Band, with the 4-hour chart suggesting a breakout. With the RSI having more room to the upside and a potential double bottom in play, Brent could revisit the potential neckline at 112. A break higher would open the door to the measure-move projection, $20 above the neckline. However, if the band holds firm, the Brent price could reverse all the way back to the lower band at $92, exposing $80.

Source: SpreadEx | Brent Crude, 4-hour Chart