Oil prices jumped on Monday before later surrendering gains as rising tensions between the United States and Saudi Arabia weighed on investor sentiment.
U.S President Donald Trump threatened “severe punishment” for Saudi Arabia if they were responsible for the disappearance of a Saudi Journalist. With Saudi Arabia vowing to “respond with greater action” against any US sanctions, fears immediately heightened over the kingdom cutting production. Although oil prices seem to be trading lower today amid the risk-off mood, the outlook points to further upside.
Rising geopolitical tensions in the Middle East coupled with looming US sanctions against Iran are two likely factors to push oil prices higher by year end.
Geopolitical risk factors may create uncertainty over the global supply outlook ultimately fuelling fears of possible supply shocks. If the situation concerning the disappearance of a Saudi journalist escalates and Trump ends up imposing economic sanctions against Saudi Arabia, oil prices are seen appreciating sharply. The aggressive upside is based on the notion of Saudi Arabia retaliating by reducing oil supply, at a time where the U.S. will be imposing sanctions on Iran's oil exports.
While the current market conditions and geopolitical developments currently favour higher oil prices, global trade tensions still remain a threat to upside gains down the road. Escalating trade disputes present a significant threat to global growth and stability. If a full-blown trade war becomes reality, global growth could take a hit consequently crippling demand for crude.
In regards to the technical picture, WTI Crude is under pressure on the daily charts with prices trading marginally below $80.00 as of writing. Sustained weakness below this level could send prices towards $78.20 and $77.50, respectively. For short-term bulls to jump back into the game, WTI Crude needs to secure a daily close back above $81.00.
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