Oil Is Waiting for Israel Response to Rally

Brent crude oil is down 1.0% this week, trading at $77.70 per barrel, retreating from its two-month high of $81.57 per barrel on Monday. Despite the pullback, oil prices remain elevated due to two key drivers: macroeconomic factors and geopolitics.

Geopolitics has become the primary catalyst for the recent oil price rally. While strong macroeconomic data—such as JOLTs job openings, Nonfarm Payrolls, and a positive non-manufacturing PMI—have had a moderate impact, the most significant market reaction came from U.S. labor data released last Friday. In September, the U.S. economy added 254,000 jobs, well above the consensus forecast of 147,000, and the unemployment rate dropped to 4.1% from an expected 4.2%. This strong economic data supports the commodity market, but it is geopolitics driving oil prices higher.

The geopolitical boost was amplified when President Joe Biden warned on October 3 that the U.S. would not support an Israeli retaliation targeting Iran’s nuclear facilities or oil infrastructure. This sent Brent crude prices up to $79.75 per barrel last Friday. Prices later retreated as the U.S. Department of State clarified that Israel had not ruled out targeting Iran’s nuclear facilities. Despite this, Brent crude ended the week with an 8.2% gain.

Over the weekend, Iran’s oil minister, Mohsen Paknejad, visited the Kharg Island oil terminal, responsible for 90% of Iran's oil exports. His reassurances amid the escalating conflict heightened market concerns, driving Brent prices up another 3.8% on Monday. The rally was capped at a strong resistance range of $79.00-81.00, and a further breakthrough is unlikely until a significant escalation, such as an Israeli strike, occurs. If prices breach the $81.00 mark, they could quickly rally toward $90.00 per barrel.

Adding complexity, Saudi Arabia’s potential increase in oil production, originally seen as a threat to OPEC+ alliance, may now be interpreted as a contingency plan for potential disruptions in Iranian oil supplies. Should disruptions occur, Saudi Arabia could step in to stabilize global markets, possibly capping Brent prices at $90.00-100.00 per barrel. While this scenario may seem distant, it mirrors the conditions preceding the 2008 financial crisis when oil prices spiked dramatically.

Investor sentiment supports this upside outlook. The United States Oil Fund (USO) reported net inflows of $31.8 million last week, following $58.3 million the previous week. This week, inflows surged to $114.3 million, signaling growing optimism among large investors.

From a technical perspective, a reverse head-and-shoulders pattern has formed, indicating the potential for Brent crude to rally to $94.00 per barrel. However, a decisive move above $81.00 is necessary before joining the rally. While positive economic data may offer limited impact, all eyes remain on geopolitical developments, especially any retaliatory action from Israel.