While probably only temporary the crude oil pendulum swung dramatically back in favour of higher prices this week. On that basis we suspect that WTI crude oil's range around $55 per barrel (/b) seen these past three months now has shifted higher towards $60/b. Next up EIA's weekly stock report and FOMC meeting.

While probably only temporary the crude oil pendulum swung dramatically back in favour of higher prices this week when attacks on the world’s biggest oil processing plant in Khurais and Abqaiq in Saudi Arabia temporarily knocking out 5 per cent of world supply. For a couple of days, the uncertainty resulted in major price swings before Saudi officials calmed the markets after saying that supplies would be restored sooner than the market had feared.

Following a week where oil market reports warned about the risk of emerging supply gluts due to weak demand growth the spike was painful but could have been a lot worse considering the amount of oil being impacted.

Rising oil prices into an economic slowdown leading to lower demand growth is not a good combination. This is probably the main reason why the crude oil rally deflated so quickly. The risk to supply from a geo-political escalation and Saudi Arabia’s apparent weakness when it comes to protecting its assets should keep the prices supported during the coming weeks. The risk of a supply shortfall has been ruled out with Saudi Arabia tapping into its domestic stockpile stocks of 180 million (Source: JODI) to meet any production short fall.

However, the geo-political risk premium, judged to be anything above $60/b is likely to take longer to disappear. Iran which has been accused of being behind the attacks increasingly find itself trapped in a corner with rising sanctions pressure making it increasingly impossible to sell its oil.

On that basis we suspect that WTI crude oil's range around $55/b seen these past three months now has shifted higher towards $60/b. A negative surprise from the FOMC later today could hurt equities help send oil lower while doubts about Saudi Arabia’s ability to meet its timeline for repair or an escalation may send it higher.

About the author:

Ole Hansen is head of Commodity Strategy at Saxo Bank, a specialist bank in online trading and investment.