Oil's Short-Covering Rally: Geopolitics, Inventories, and the Race to $80

The price of Brent crude futures has surged to $74 per barrel this week—the highest since December 2023—after Israel's June 13 air strikes on Iranian nuclear facilities reignited fears of a broader conflict in the Middle East. This rally, driven by geopolitical risks and short-covering activity, has sparked debates among traders and analysts about whether this marks the start of a sustained climb toward $95 or a fleeting spike that will reverse once tensions ease. Let's dissect the factors at play.

Geopolitical Risks: The Catalyst for the Rally

The immediate trigger is clear: fears of a supply disruption through the Strait of Hormuz, which handles 25% of global oil exports. Analysts estimate that a prolonged blockage here could push prices toward $130/bbl—a scenario that seems extreme unless hostilities escalate. For now, traders are pricing in the risk premium, with Brent gaining $5/bbl in a matter of days. But the market remains cautious: without concrete evidence of supply interruptions, the rally could stall.

The Short-Covering Play: Why the Rally Feels Artificial

The price jump isn't just about fundamentals. It's also a classic short-covering rally. As geopolitical fears mounted, traders who had bet against oil (short positions) scrambled to close their losing trades, pushing prices higher. This dynamic is visible in the technical indicators: the RSI (Relative Strength Index) for crude is now overbought at 78, suggesting near-term profit-taking.

Supply and Demand: A Delicate Balance

Underlying this volatility are the supply-demand fundamentals.

• Supply: Global oil production rose to 105 million barrels per day (mb/d) in May, with OPEC+ output at 42.21 mb/d—slightly above targets. Saudi Arabia and the UAE are leading the increases, while Russia's exports fell by 230,000 barrels per day (kb/d) in May, trimming revenues by $480 million.
• Demand: Growth for 2025 is now expected to be 720 kb/d—slightly below earlier estimates—due to weak US and Chinese data. Analysts are also factoring in the long-term shift to clean energy, which could cap demand growth at 740 kb/d in 2026.

Inventory Data: A Mixed Picture

Inventory levels provide another layer of context. Global oil stocks rose for the third straight month in April, with builds in non-OECD countries. OECD inventories dipped slightly but remain 97 million barrels below 2024 levels. This suggests that while there's no immediate shortage, the market isn't overly flooded either.

Technical Levels: Where Could Prices Go?

Traders are fixated on key resistance and support zones:

• Resistance: A break above $75.80–$77.00 (the descending trendline) could open the door to $80+/bbl. Beyond that, the $90–$95 range looms, though this would require a sustained supply shock.
• Support: The $71.30 level is critical for bulls; a breach could push prices back toward $65–$68/bbl, where psychological and technical support reside.

The Bear Case: Why the Rally Might Fizzle

Not everyone is bullish. Swissquote analysts argue that without a Hormuz closure, prices are capped at $80–$90/bbl due to OPEC+ oversupply risks and slowing demand. The Fed's hawkish stance—keeping rates high longer—also weighs on commodities, as higher borrowing costs reduce speculative buying power.

Investment Implications

• Bullish Traders: Buy dips near $72/bbl, targeting $74–$77. A close above $77 could signal a move toward $80+.
• Bearish Traders: Short positions above $75, with stops above $80.
• Risk Management: Monitor geopolitical headlines and OPEC+ production compliance. A drop below $71.30 invalidates the bullish case.

Conclusion: Between $70 and $90—For Now

The oil market is caught in a tug-of-war between geopolitical fears and technical overbought conditions. While a $95 rally remains possible, it requires a catalyst like a Hormuz blockage or OPEC+ cuts—a scenario that's plausible but not yet probable. For now, the likely range is $70–$90/bbl, with traders using technical levels as their road map.

Investors should treat this as a short-covering rally first and a fundamental shift second. Stay nimble, and keep an eye on the Strait of Hormuz—because in oil markets, geopolitics often writes the script.