Brent and the West Texas Intermediate (WTI) crude oil benchmarks jumped on Monday, reaching their highest levels since June 12 as the crisis in the Middle East escalated.
Even so, Professor John Mearsheimer has warned that this rally could accelerate in the near term.
John Mearsheimer warns on crude oil prices
Mearsheimer, a distinguished professor from the University of Chicago, has warned that crude oil prices could surge in the coming days or weeks unless President Donald Trump ends his escalation.
In an interview with Chris Hedges, Mearsheimer cited several reasons why the crisis will move from bad to worse, especially if President Donald Trump ramps up his attacks against Iranian infrastructure this week.
He believes that Iran is in a better place in terms of the escalation ladder, as it has more areas left to target.
For one, if the US attacks Iranian oil and gas infrastructure, Iran can reciprocate and hit similar projects in the region. Such a move would mean that the energy sector will take a long time to recover, even when the war ends.
At the same time, Iran has already shut the Strait of Hormuz, where 20% of the world’s oil flows through.
If the situation escalates, it can hit and fully halt operations in Fujairah, where the United Arab Emirates is selling over 1.5 million barrels of oil per day.
Most importantly, Iran, by teaming up with Ansah Allah, can close the Bab al-Mandab.
This would be a major move as Saudi Arabia is selling over 9 million barrels of oil per day through this route. Such a move would remove millions of barrels of oil from coming to the market.
Mearsheimer believes that Trump’s goal of pushing Iran into a deal will fail. He noted that hardliners who opposed the MoU have been proven right and that they will oppose any negotiations with the US.
They may also seek to prolong the war, potentially through the midterms.
Oil inventories are slumping
This situation would happen at a time when oil inventories have plunged. In a recent note, Energy Aspect’s Amrita Sen explained that the world’s oil inventories, excluding the Strategic Petroleum Reserves, stood at over 400 million barrels before the start of the war.
Most of this oil is now gone, a point that Trump noted when he announced the Memorandum of Understanding (MOU) with Iran. She also warned that demand would jump if China was to restart its oil buying frenzy.
A report by the Energy Information Administration (EIA) noted that US oil inventories dropped by 1.7 million barrels in the previous week.
WTI crude oil price technical analysis
WTI oil price chart | Source: TradingView
The daily chart shows that WTI has made a strong rebound in the past few days, moving from $67.21 in July to the current $83.63. It has already jumped above the 50-day Exponential Moving Average (EMA).
At the same time, the Average Directional Index (ADX) has jumped to 24, a sign that the trend is strengthening. Therefore, the path of the least resistance is upwards unless President Trump and the Iranians de-escalates.
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