The $105 Level
Crude oil looks set to close the week near $100 a barrel, the first time since mid-May. We are now in month seven of what was called a four-week war between the U.S. and Iran, and the market is losing patience.
The last $10 rally happened in three days. That was excessive. Counting actual barrels, a $10 move in three days is hard to justify because supply has not been cut in any large way. What drove it was a shift in mood. The administration moved from saying the war's end was near to signaling it may run through the rest of its term, two years out. So the market added risk premium to the price, and did it all at once, which is how crude tends to move.
On the daily chart, $105 is critical resistance and will likely hold. Once it holds, prices should grind back lower. The move down will be messy, but that is the path of least resistance. (Earlier the low $90s were expected to hold, but conditions changed fast.)
The worry is a break above $105. That would pull in inflation-hedge money and commodity-fund money, pushing prices much higher. The October futures expiration is a couple of weeks away, and crude expirations can turn chaotic, with real price-squeeze risk. There is no easy money on either side. Anyone trading crude should use back-month contracts for a smoother ride; the front month is exposed to wild swings into expiration.
Upside Risks and the Ceiling
On a 20-year monthly chart, the top of the trading range sits near $125. A break above $105 opens the door to $125, though that is unlikely. Once crude puts in a blowoff monthly bar, as it did this past January and February, that usually marks the high; later rallies fall short and the market rolls into a bear phase. That is the most common pattern, but this is a wild environment and anything can happen.
Seasonality also turns against oil. The seasonal high usually comes in the first or second week of October.
When crude moves this hard and fast, it breaks things. Diesel has soared to all-time highs, above $6 a gallon for the first time ever. AAA gas sits at $4.30. When prices climb like this, consumers get squeezed and pull back their spending, and it happens quickly. The higher oil goes, the more demand destruction becomes a real problem. The IEA pointed to the same risk in its demand outlook.
Consumers and Demand Destruction
People are already struggling with higher prices and cutting back in other areas. Eventually they cut travel and transportation too. Airline tickets are wildly high, in some cases 40-50% above prices earlier this year, before the war. The University of Michigan sentiment reading out this morning showed fuel prices continuing to drag down how consumers feel.
Boom and bust is the whole story of commodities and always has been. No one knows exactly when or where demand destruction hits, but it always hits. High prices always cure high prices. Oil has boomed and busted for hundreds of years, not just the last 20. People find substitutes, find other entertainment, find another way. Supply also responds.
Supply Coming Back
OPEC still has some room to keep adding supply. Venezuela is beating estimates: most expected it to bring back only about 100-150 million barrels a day, but it is getting close to 400-500 million barrels a day, offsetting nearly half of the lost Iranian oil. Traders and media focus on the negatives and not enough on the positives.
Oil could go higher in the short run, and short-squeeze risk is real. But the bigger picture is a supply glut. We came into this with a glut and will likely come out with a bigger one, especially if the economy slows or slips into recession. Oil did this in 2008 and 2020: when things slow fast, oil cannot be stored easily and prices collapse very fast. What looks obvious today, a bull market in oil, can be something completely different in a couple of months. That holds even with refining damage and refining capacity coming offline.
When prices rise, suppliers push to bring more to market, because that is when they make their money. Then the switch flips and there is too much. It happens in corn, soybeans, wheat, everything, and always when least expected.
The 2008 Lesson
In 2008, oil hit $150 a barrel and was screaming higher. The USO, a crude oil fund open for trading at the time, likely added to the rally. The accepted narrative was that the world was running out of oil and prices could only go higher. That belief peaked with the price. Two months later crude traded closer to $30 a barrel. These reversals sneak up when least expected.
