Oil Price Forecast: Red Sea Supply Risks Could Push Crude Oil to $120

A full closure of the Bab el-Mandeb Strait could send oil prices higher. The route transports crude oil and petroleum products from the Middle East to Europe and Asia. Any major disruptions may reduce the available shipping routes to transport the oil products from the Middle East. Traders can then factor in a greater supply risk. This may push up the crude oil prices and renew the fears of another strong rally. Saudi oil exports would face the biggest immediate pressure. Tankers from Red Sea port of Yanbu may have to pass the Cape of Good Hope. This longer route would add weeks to delivery times. It may also contribute to higher freight, fuel and insurance expenses. Delays may be possible for Asian refiners and they may also have to search for alternative supplies. This competition can affect both crude oil and refined product prices. The effects could also spread over to the diesel and jet fuel markets. Europe depends on the shipments that pass through the Bab el-Mandeb. A closure would reduce supplies and boost refining margins. The increased energy cost may also contribute to inflation and slowdown in global economic growth. But if the disruption is severe and is prolonged for weeks, oil prices could climb back to $120 a barrel.

WTI crude oil formed a strong bottom during the consolidation from June 18 to July 13 and broke higher. The price has also broken the descending trendline extending from the May 19 high and is now approaching the $86 resistance. This resistance is defined by the descending channel pattern. A break above $86 will likely push WTI crude oil toward the $96 level while a break below $72 will open the door for another drop toward the $60 region. The short term target for WTI crude oil is expected to be in the $100-$110 range. The weekly chart also points to the higher prices in the coming days. The price has already closed above the $80 region and is now looking toward the $100 zone. The oil market has experienced strong volatility since the U.S.-Iran war. Therefore, the next move in the market will likely be driven by geopolitical developments.

Brent crude oil formed a strong bottom at the $72 support level, initiated a rebound and closed above the 50-day SMA. The 50-day SMA remains above the 200-day SMA, and the price must now break above $90 to continue the bullish momentum in Brent crude oil. However, a break below $81 will negate the short-term bullish momentum and keep Brent crude oil in the consolidation zone. Brent crude oil is rebounding from oversold conditions, which indicates that a break above $90 could open the door for a strong rally toward $120. The weekly chart for Brent crude oil also shows strong bullish momentum as the price has recovered above the 50- and 200-week SMAs. The close above $91.29 last week indicates that Brent crude oil may move higher toward $100. A break above $100 will signal a move to $130. The oil price correction in WTI and Brent crude was driven by the extremely overbought conditions shown by the weekly RSI. But the RSI has now normalized and prices are poised to regain momentum.

Bottom Line Oil prices remain strong above the key support levels due to the rising geopoliti...