Piece written by Alexa Smith, Trive Financial Market Analyst 

Over the weekend, Hamas initiated one of the most significant military offensives against Israel in decades. This escalated into continuous hostilities, characterised by retaliatory air strikes by Israel throughout Monday night. While Israel’s own crude oil production is relatively modest, market apprehensions centre around the possibility of the conflict’s escalation impacting the Middle East oil supply, exacerbating an anticipated supply deficit for the remainder of the year. 

As a result, the United States Oil Fund (NYSEARCA: USO) gapped up in anticipation that demand would continue to outweigh supply. Moreover, if reports about Iran’s involvement prove accurate, it could further propel oil prices upward. Such an outcome would stem from expectations of stricter US enforcement of oil sanctions against Iran, thereby adding to the existing supply constraints in the market. Against the supply backdrop, Federal Reserve officials conveyed their concerns regarding the ascent of US Treasury yields on Monday, suggesting that this development might dissuade the central bank from pursuing additional interest rate hikes. A pause from the Fed would further boost demand and lend support to oil prices.  

Technical 

After experiencing a modest decline, the United States Oil Fund gapped up and settled at the 50-day moving average, in line with the ascending channel’s lower boundary. The ETF trickled lower due to expectations that the Fed would hike interest rates once more before the end of the year, but rising treasury yields swayed the Fed from hawkish to dovish, encouraging a leg up.  

If the price action breaches the channel support, the $82.96 resistance may mark the next point of interest. In this case, a broader uptrend could play out, supported by the divergence of the 50-day moving average above the 100-day moving average. However, a breakdown of the 50-day moving average may have the opposing effect and encourage a leg down towards the $74.28 support, denoted by the 38.20% Fibonacci Retracement level.  

Summary 

The United States Oil Fund gapped up due to anticipations of tighter supply as a result of conflict in the Middle East. If the ETF breaches the channel support, the price action may attempt to retest the $82.96 resistance. However, a breakdown of the 50-day moving average line may encourage a pullback towards the $74.28 support.  

Sources: TradingView, Reuters, Trading Economics