What War in the Middle East Means for Oil

Last month, I called for a sharp sell-off in oil.

A day later, crude oil topped out.

Between September 27 and October 6, oil dropped by over 14%. Then, on October 7, armed conflict erupted in the Middle East. Hamas launched an invasion against Israel.

Thousands of rockets were launched at Israel, followed by a large group of armed militants. Israel has vowed a vicious and violent response.

The conflict has spooked energy traders. When the markets opened after Hamas’ attack, oil prices went up about 4%.

But there are fears that other Middle Eastern countries could get involved in the conflict.

For our purposes, I’m going to look at this event from an economic standpoint…

Approximately 30% of the world’s oil production occurs in the region. Iran, for instance, is one of the largest oil producers in the Middle East.

If a country like Iran gets directly involved, it could impact production capabilities. Such an event would theoretically send oil prices higher.

I don’t know whether Iran will insert itself into this conflict or not. It’s too early to say…

But what does seem a lot clearer than the situation in the Middle East is what’s going on with crude oil.

The last time we found ourselves in a similar situation was in February 2022. That was when Russia ultimately ended up invading Ukraine.

At the time, I wrote that while oil prices were likely to shoot up in the event of a Russian invasion, they would also come back down just as fiercely.

My current analysis sees something similar – albeit on a much smaller scale – happening now.

Take a look at the chart below…

There are two important moving averages (MA) here, the 20-period and 200-period. They’re a great indicator of both the short-term and longer-term trends, respectively.

Prices are currently trading between both MAs. The 20-MA is above current prices and the 200-MA is below them.

Breaking below the 20-MA was a clear sign that the short-term trend had changed. Don’t be surprised if oil shoots up to briefly test that 20-MA once again. That would see oil rebound to around $88.

After that rebound, we should expect another steep decline near the 200-MA of $77, at minimum.

The bottom line here is that traders shouldn’t rush back into oil trades just because of renewed conflict in the Middle East.

Traders eager to play the downside in oil should remain patient. Selling oil at these levels will likely get you chopped up. It’s better to wait for the next rebound before looking for another short-side setup.

Regards,

Imre Gams

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