2025: The Year of Soaring Oil Prices?

As we dive into October, the crude oil market finds itself riding waves of uncertainty, caught between rising geopolitical tensions and fluctuating supply dynamics. The stakes are high, and the world’s attention is firmly on the Middle East, where political conflicts threaten to turn into major supply disruptions. Add to that a hurricane hitting U.S. oil infrastructure, and it’s clear that the outlook for crude oil is set for a wild ride.

Geopolitical Tensions: The Middle East on a Knife’s Edge

At the heart of the current crisis is the growing tension between Israel and Iran. With missile attacks and talk of retaliatory strikes on Iranian oil infrastructure, the market is bracing for potential chaos. If Iran’s oil exports are significantly curtailed, we could see Brent crude prices skyrocket. The Strait of Hormuz, a vital chokepoint where 20-25% of the world’s oil flows, is especially critical. A disruption here would send shockwaves through the oil markets, pushing prices into uncharted territory. As global leaders grapple with this high-stakes game of geopolitical chess, the question remains: Can OPEC+ stabilize the market if things spiral out of control?

OPEC+: The Spare Capacity Dilemma

While geopolitical tensions are pushing prices upward, OPEC+ has a card to play—its spare production capacity, primarily held by Saudi Arabia and the UAE. This cushion, around 5.86 million barrels per day, could help mitigate some supply shocks. However, the concentration of this spare capacity in the Middle East is a double-edged sword. If the conflict spreads, OPEC+’s ability to intervene may be compromised, keeping the market on edge. Even if OPEC+ steps in, the persistent tension could maintain upward pressure on prices, suggesting we could be in for a sustained period of elevated oil costs.

Hurricane Milton: A Wild Card in the Mix

As if geopolitical tensions weren’t enough, Hurricane Milton has added to the turmoil. The hurricane wreaked havoc on U.S. oil infrastructure, with fuel supplies disrupted across Florida. Over 3.4 million homes and businesses lost power, and 25% of fuel stations reported outages, causing gasoline futures to jump by 4.1%. This, in turn, has contributed to the overall rise in oil prices, further fueling an already bullish market.

Demand Dynamics: The China-India Oil Tango

On the demand side, major economies like China and India remain pivotal players. China, which relies heavily on Iranian oil, may be forced to tap alternative suppliers if exports from Iran dry up. This could further tighten the market, pushing prices higher. India, too, has seen a surge in crude oil imports, up 6.4%, putting additional strain on an already delicate supply-demand balance.

For India, which imports about 85% of its oil, higher prices spell trouble for the economy. In 2023, India’s oil imports cost a staggering $177 billion. If prices continue to rise, the Indian rupee could weaken further, potentially breaching the ₹84 mark against the US dollar. This would escalate India’s trade deficit, adding to inflationary pressures and putting the Reserve Bank of India in a tough spot, likely forcing intervention to stabilize the currency.

Technical Outlook

Brent Crude Oil is currently at a pivotal point, with prices bouncing off the key support zone between 66.05 and 70, a level that has been tested multiple times in the past, suggesting strong buying interest. The recent price action shows that Brent is attempting to break the broader downside trendline on the upside. Key resistance lies at 90.70, and a successful break above this could pave the way for further gains toward 106.00 and 116.90 respectively. Overall, Brent Crude is at a critical juncture, and the coming weeks will determine whether it resumes its downtrend or begins a sustained recovery.

Conclusion: The Bullish Crude Oil

In the face of mounting geopolitical tensions, supply disruptions, and natural disasters, crude oil prices are poised for further gains. With Iranian exports under threat and the Strait of Hormuz in the spotlight, the potential for a price surge beyond $90 per barrel is real. Even with OPEC+ on standby, the market is bracing for volatility.  Investors and market watchers should brace for the possibility of further price hikes and a bumpy road ahead. In this landscape of uncertainty, one thing is clear—oil markets are on the bullish move, and the journey is far from over.

Amit Pabari is a managing director ar CR Forex Pvt Ltd. The views expressed in this article are his personal views.

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