The most severe oil shock in recent history failed to push prices to record highs. Brent is rapidly retreating toward its pre-conflict levels, even though a formal agreement between the United States and Iran has yet to be signed. What is driving this remarkable turnaround in the oil market? Let’s explore the key factors and develop a trading strategy.
The article covers the following subjects:
Major Takeaways
- Supply disruptions failed to push Brent to record highs.
- The TACO trade drove oil prices lower.
- The market will likely shift from trending to consolidation.
- A rebound from the boundaries of the $74–$84 range may present an opportunity to open positions.
Weekly Fundamental Forecast for Oil
At the start of the conflict in the Middle East, there was much talk that Brent would soar to $200 per barrel amid the most severe crisis in history. However, the price peaked at $120. Investors then decided that Brent crude would not return to pre-war levels by the end of the year due to extensive infrastructure damage in the Gulf states and tanker owners’ skepticism about the resumption of traffic through the Strait of Hormuz. The reality turned out to be different. Prices plummeted to their lowest levels since early March within days.
Performance of Stock Indices, Oil, and Gold
Source: Wall Street Journal.
Before the conflict in the Middle East, a blockade of the Strait of Hormuz was seen as an apocalyptic scenario. The loss of 14 million bpd in supply was nearly twice the disruption caused by the withdrawal of one of the largest producers from the market due to events in Ukraine in 2022. Russian exports at that time were estimated at 7.5 million bpd. Four years ago, Brent rose to $137 per barrel. During the 1973 Arab oil embargo, the 1978 Iranian Revolution, and the 1990 Gulf War, prices soared by 300%, 160%, and 130%, respectively.
Notably, there were no massive reserves back then, and the market was not on the verge of the largest surplus in history. Oil lacked stabilizing factors, such as US export growth reaching record levels and Chinese imports falling to an eight-year low. Nevertheless, the modest rise in Brent, followed by a collapse, suggests there are other reasons as well. Especially since, apart from the resumption of Iranian supplies, no particular factors have been observed that would explain why Middle Eastern oil has moved into contango.
Contango and Backwardation in Oil Market
Source: Bloomberg.
Brent’s failure to reach record highs enabled investors to adopt the TACO strategy—short for “Trump Always Chickens Out”—a commonly used market strategy. The baseline scenario was a deal between the US and Iran. At the same time, an escalation of the conflict—such as the US resuming airstrikes against Iran—was seen as a reason to sell Brent crude on upswings.
The relevance of TACO is waning, and profit-taking on short Brent positions may trigger a consolidation phase. It will not be easy for countries that have rerouted their shipments to abandon their new routes. Especially since significant disagreements between the US and Iran do not guarantee that the Strait of Hormuz will not be closed again in two months.
Weekly Trading Plan for Brent
Brent has reached all previously set target levels for short positions established at $98.6 per barrel. As the TACO strategy plays out, oil will likely move into the $74–$84 range. As a result, one can sell oil when it pulls back from the upper boundary of this range and buy it when it rebounds from the lower boundary.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of UKBRENT in real time mode
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