How escalating geopolitical tensions are impacting oil markets

All price information and forecast data in this article is sourced from TradingView, Reuters.

The bullish momentum in oil prices remains strong as escalating geopolitical tensions raise concerns about supply. Ongoing Ukrainian attacks on Russian refineries and the Israeli attack on an Iranian embassy in Syria have caused nervousness in markets, causing a pullback from all-time highs in major equity indices. However, these concerns have pushed oil prices higher as they increase the risk of tightness in supply. The fact both gold and oil are moving higher simultaneously evidences that this move is supply and not demand-driven, specifically relating to the risk-off sentiment.

A Ukrainian drone on Tuesday struck one of the five largest oil refineries in Russia. At least 12 people were injured in the attack, which caused a fire at the primary refining unit, according to Russian officials. These daring Ukrainian strikes are hitting Russia’s massive oil and gas industry, which despite Western import bans and price caps has remained the biggest source of revenue for Moscow’s war economy. This is making investors nervous and is likely to keep prices supported in the medium term.

Focus is also likely on the Federal Reserve and expectations around its future monetary policy. A change in market pricing of rate cuts is likely to see some movement in the dollar, which in turn affects oil prices. With resilient economic data, it's unlikely that the central bank will cut any time soon – Powell has said so even if he is looking forward to cutting himself. Markets will need to adapt to the change in expectations and this could push the dollar higher, limiting the upside in oil prices. A few FOMC speakers – including Chairman Powell – will be offering comments on Wednesday.

Furthermore, Chinese demand remains weak albeit recovering. Chinese manufacturing activity in March expanded for the first time in six months, according to an official factory survey. China is the world's largest crude importer so we could see further bullish momentum in oil prices if the data continues to improve, causing demand forecasts to increase.

US crude (WTI) daily chart

Past performance is not a reliable indicator of future results.

Technically, US crude (WTI) has pushed beyond the key resistance range between $80.65 and $82.54 which is significant progress for buyers. The path of least resistance remains higher, but buyers should be aware of the overbought RSI which could cause a technical correction over the coming days.

All price information and forecast data in this article is sourced from TradingView, Reuters.