Oil markets have experienced volatility, with WTI crude reaching $65.66, the highest since August 6. Despite a $1 selloff and subsequent recovery, current trading shows a rise of $1.65.
Time spreads are expanding, positively affecting the supply and demand scenario. In global politics, the US is encouraging Europe to halt Russian oil imports, while India and Russia deepen their ties.
Middle Eastern Developments
Middle Eastern developments include new sanctions on tankers transporting Iranian oil. Upcoming discussions by OPEC+ on Sunday are anticipated, with no addition of new barrels expected for the first time in some period.
Technically, if the present highs are surpassed, a return to $70 could potentially occur.
With WTI crude pushing past the $70 mark last week, the bullish momentum we anticipated has materialized. The market is now consolidating around $72, supported by a combination of tight supply and persistent geopolitical risk. This price action confirms that the break of the mid-August highs was a significant technical signal for traders.
That OPEC+ meeting a couple of weekends ago went as expected, with the cartel holding production levels steady for another month. This decision is keeping near-term supply tight, which we see reflected in the backwardation of the futures curve. The front-month contracts continue to trade at a premium, signaling strong immediate demand for physical barrels.
Adding to the Bullish Sentiment
Adding to the bullish sentiment, last week’s EIA report showed a larger-than-expected crude inventory draw of 5.2 million barrels. This was compounded by recent Chinese manufacturing data, which saw the PMI unexpectedly climb to 50.8, suggesting industrial demand is holding up better than feared. Global demand indicators are looking much stronger than they did just a month ago.
Geopolitical tensions are not fading, providing a solid floor for prices. The efforts to cap Russian oil revenues are ongoing, and we’ve seen tighter enforcement on the network of tankers carrying sanctioned Iranian oil. These factors continue to remove barrels from the global market and add a significant risk premium.
Given this backdrop, we believe buying out-of-the-money call options is the most direct way to position for further upside. Specifically, we are seeing heavy interest in the October $75 and $80 strike prices. Selling put credit spreads with a floor around the $68 level also presents a high-probability strategy for those looking to collect premium.
This setup reminds us of the market conditions back in 2021, when constrained supply and recovering demand created a sustained rally. If crude can hold above the $70 support level, the next technical target we are watching is the $77-$80 range in the coming weeks. Traders should remain alert for any signs of demand destruction, but the current path of least resistance is clearly higher.
