Sector Focus 2 – Oil

18/05/26 – 25/05/26

This week’s focus: The Oil Sector

Energy Information Administration (EIA) recorded price movements:

Benchmark / Crude Grade	% change
Brent Crude Oil (international pricing standard):	-11.98%
WTI (Western Texas Intermediate – US benchmark):	-13.02%
Dubai Crude (pricing baseline for Middle Eastern oil companies):	-7.2%

(Exact percentage change in derivates market depends on whether price reflects spot price or futures contract – spot price is price for oil delivered right now whereas futures contract reflects price agreed today for oil delivered in the future. Given futures prices incorporate the ‘cost of carry’ – storage, insurance, etc – the futures curve often trades higher than the spot price (contango)) .

Macro Drivers:

Global crude oil prices have experienced a volatile downward swing this week. Brent and WTI crude dropped by roughly 12% as growing optimism regarding a ceasefire between the US and Iran prompted traders to speculate on the future of the blockaded Strait of Hormuz.

Oil prices were stubbornly elevated at the beginning of the week (Brent @ $110/bbl, WTI @ $108) after the May 21st IEA report spooked investors. The IEA stated that the start of peak summer fuel demand combined with the lack of oil exports from the middle east could push oil markets into a ‘red zone’ between July and August.

However, all good things seem to keep coming to an end (for profit-hungry oil investors of course). Price elevation quickly evaporated on May 20th as news filtered through that US and Iran were actively reviewing a draft peace proposal – which we now know is a 60-day ceasefire extension. This accompanied rumours that Iran would agree to restore commercial shipping back to pre-war levels, causing Brent and WTI to plummet. This also caused the Brent-WTI spread to widen to $6.50 (WTI hit $92.6 while Brent held at $99.18). Brent Crude typically trades at $2-5 premium to WTI as Brent is more easily traded across international markets – buyers place a higher value on delivery flexibility. However, Dubai crude dropped only 7% compared to the 13% of Brent crude and WTI, as Dubai crude is tied to physical delivery to Asian refineries who still have desperate demand for physical barrels to keep plants running, whereas WTI and Brent are both driven by heavy speculative trading on US exchanges.

Technical Indicators

Once WTI and Brent broke below the psychological $100 per barre threshold it triggered a number of technical indicator failures and shattered moving averages. The 20-Day Exponential Moving Average (the primary short-term support line during the spring rally) was aggressively breached as prices fell straight from $104 to under $97. As a result the short-term trend was quickly transformed from strongly bullish to bearish. The Relative Strength Index (RSI – measuring speed of recent stock price changes), which had been hovering above 62% – overbought territory – during the peak of the blockade panic, collapsed heavily into neutral-to-bearish territory. This confirmed that speculative buying pressure (as discussed right at the start) had completely evaporated. Finally, the $100 mark acted as a heavy psychological options-market ‘strike pivot’ and so once this level was broken it triggered institutional put-options hedging, which created a wave of forced selling that spiralled the descent to the mid-$90s. In simple terms, as soon as $100 was broken, people who had hedged their investment in oil by placing a put to sell at the $100 price automatically sold their positions.

Airlines smiling through the pain:

Keeping on the theme of oil, there was a fascinating discussion in the airline industry this week. Airline executives noted that they are not concerned over a potential oil shortage, as they have ‘successfully’ diversified their fuel sources over the past few months (FT). At the onset of the conflict in the Middle East, jet fuel rose to a record-high $1900 per tonne; however this was partially offset by an eventual rise in oil imports from the US and Africa. Additionally European oil firms maximised oil and fuel production, incentivised by the soaring oil prices. It would seem then that both supply chain adjustments have enabled airlines and importing firms to pivot away from a reliance on Middle Eastern oil in the short-term. On the basis of this ‘successful’ diversification (insinuating that the industry can cope with the soaring costs of oil imported from the Middle East) , industry leaders have this week told the FT that they are optimistic current airline ticket prices will be sustained throughout the summer period.

Summary

Overall, in spite of the optimism across the board, I think it is important both investors and industry leaders remain cautious. For investors – while there may be a ceasefire in the works, an abrupt shift in the diplomatic tone of the US is not implausible (Trump recently accused Iran of stalling the peace deal to ‘outwait’ him until US midterms), and as we know any sign of dispute between the warring parties will send oil prices right back to where they came from. I am equally sceptical of the relaxed tone adopted by airline executives. The significant demand that for air travel that is a staple of the summer period will present a major stress test for airlines and European energy networks, meaning a single supply chain disruption or resumption in conflict could quickly turn operating costs sour. To me, the road ahead is far from strait. 

(NFA)