Is the Brent crude oil price set to surge amid the US-Iran quagmire?

Brent crude oil price ended last week at $109.50, its highest point since May 5 this year. It has soared by over 13% from the lowest point this month, and may have more gains ahead as the quagmire between the US and Iran continues. Worse, it has formed the bullish inverted head-and-shoulders pattern, pointing to more gains ahead of the driving season.

US-Iran quagmire continues, with no easy way out

Brent crude oil price jumped to $109.50, while the West Texas Intermediate (WTI) jumped to $107. The rally happened after President Donald Trump warned that he was losing patience with the Iranians following his trip to China. 

Trump has been frustrated that the Iranians have not responded to his warnings. In a statement last week, he maintained that the ongoing ceasefire was on a massive life support, and hinted that he may restart the war.

Close Trump allies have pushed him to take this route. Ben Shapiro has urged him to take out Kharg Island, while Mark Levin has advocated for the use of a nuclear weapon. Lindsey Graham and other neoconservatives have also advocated for striking Iran.

However, the reality is that Trump does not want to restart the war. For one, his approval rate has dropped sharply in the past few months, and restarting the war will make things worse. 

At the same time, Iran has proven to be extremely resilient. A New York Times report last week showed that Iranians have used the ceasefire to recover its weapons. 

Restarting the war would be risky for Trump

As such, restarting the war will worsen the situation as it will push Iran to intensify its attacks against its neighboring countries like Saudi Arabia, United Arab Emirates (UAE), and Kuwait. It has already identified some potential targets to hit. 

Trump is also contending with the rising gasoline prices and inflation. Consumer inflation has jumped to 3.8%, while the producer inflation has soared to 6%. Restarting the war would also make the inflation situation worse. 

The easiest approach for Trump is to continue the blockade and hope that the economic situation will push Iranians to reach a deal. However, the US intelligence has hinted that Iran can sustain its economy for a few months.  Also, it would also mean higher oil prices for longer.

Oil inventories are plunging ahead of the driving season

Meanwhile, most analysts are warning about the plunging oil inventories in the US and other countries. This happened as countries tapped their stored oil to prevent shortages. 

Top agencies like the EIA and IEA have warned that the ongoing oil inventories drawdown is accelerating at an unprecedented rate. 

A report released last week showed that US inventories crashed by over 4.3 million barrels to 452 million barrels. IEA estimates that global inventories are plunging by 4 million barrels a day. All this is happening ahead of the US driving season when demand surges. 

Brent crude oil price technical analysis

UKOIL price chart | Source: TradingView

The daily chart shows that the price of Brent crude has jumped in the past few days. It has remained above the 50-day and 100-day Exponential Moving Averages (EMA).

A closer look shows that it has formed an inverted head and shoulders pattern, a common bullish reversal sign. Therefore, there is a risk that the price will continue rising, potentially to the neckline at $115. A move above that level will point to more gains, potentially to $119.50, its highest point this year.