Brent holds atop $110 as geopolitical risk overrides easing physical stress

The key shift in October is that the oil price rally has changed character from reflecting genuine physical tightness to what could happen next, explains Kaynat Chainwala of Kotak Neo.

Disclaimer: Views and outlook in this report belong to the brokerages and analysts cited. They do not reflect the views of Business Standard. Readers are advised to exercise discretion. Kaynat Chainwala, AVP Commodity Research of Kotak Neo  Brent is trading near $115 a barrel and WTI around $101, close to six-month highs. Brent briefly crossed $117 last week and has gained more than 12 per cent this month, putting it on course for a fourth consecutive monthly rise. Diplomatic engagement is easing part of the war premium, but attacks on Saudi infrastructure and shipping around the Strait of Hormuz continue to keep supply risks firmly embedded in prices. Talks have yet to produce a credible path towards de-escalation. Iran, Saudi Arabia, Turkey and Pakistan have agreed to continue discussions on regional security, but Tehran has maintained its conditions for ending the conflict. Washington's position also remains uncertain, with President Trump warning of tougher action if negotiations fail and reports suggesting renewed US-Israeli strikes on Iran remain under consideration after the November 3 US midterm elections. The premium in Brent now extends beyond current disruptions and reflects the risk that the conflict broadens in the coming weeks. Diplomatic headlines may trigger short-term pullbacks, but a lasting decline requires concrete progress on shipping security and attacks on energy infrastructure. Physical stress has nevertheless eased since mid-October. The EFP has fallen to 6.82 from 24.35 on October 14 and a cycle high of 31.38 on October 8, signalling that the scramble for prompt barrels has moderated as regional flows recover. The 3-2-1 crack spread has also eased towards $50 a barrel from more than $70 earlier this month, indicating softer, though still elevated, product tightness. Yet crude prices have continued to rise. The market is no longer trading current supply losses alone; it is increasingly pricing the probability of future disruptions. Physical conditions have improved, but repeated attacks on Saudi assets and the risk of broader regional escalation have widened the geopolitical premium embedded in Brent. Tight inventories and healthy refining margins continue to provide a fundamental floor, limiting downside even if tensions temporarily ease. Saudi Arabia remains the market's key vulnerability. The kingdom has increased flows through its East-West pipeline towards 7 million barrels a day, redirecting crude to the Red Sea and reducing reliance on Hormuz. This has improved supply resilience but also increased the strategic importance of Yanbu as an alternative export outlet. Recent attacks or claimed strikes on Shaybah, Aramco's headquarters in Dhahran, facilities around Yanbu and Ras Tanura have not yet led to a sustained loss of production or exports. Markets are therefore pricing disruption risk rather than confirmed lost barrels. A prolonged outage at Ras Tanura or Yanbu would materially alter that assessment by threatening Saudi Arabia's Gulf and Red Sea export routes simultaneously. Some supply offsets are helping contain the rally. Flows through the Strait of Hormuz have recovered, averaging 11.7 million barrels per day this month, while Saudi Arabia is making greater use of alternative export routes. The G7's planned release of up to 100 million barrels of reserves over four months, with diesel front-loaded, should provide additional support, while potential Russian diesel flows could ease pressure in refined products. These buffers, however, remain limited. US commercial crude inventories are tight following consecutive weekly draws, while strategic reserves offer less protection than in previous supply shocks. OPEC+ also has limited flexibility, with several core producers already operating below target levels. High prices are beginning to slow demand, but that adjustment is unlikely to offset a sudden supply disruption. The near-term balance remains tilted to the upside, although the decline in the EFP and crack spread should limit rallies driven purely by headlines. Physical availability is improving, but the geopolitical premium remains difficult to unwind while Saudi infrastructure and regional shipping continue to face repeated threats. In the base case, Brent is likely to trade between $110 and $118 with an upward bias. A sustained break above $117 and a move towards $120 would probably require a confirmed Saudi production or export outage, a breakdown in regional talks, or clear movement towards renewed US-Israeli strikes on Iran. Conversely, a credible ceasefire framework, supported by verifiable steps to protect shipping and energy infrastructure, could strip out a significant portion of Brent's geopolitical risk premium and pull prices back towards $100. The key shift in October is that the rally has changed character. Earlier in the month, prices reflected genuine physical tightness. Today, those pressures have eased, yet Brent remains elevated because traders are increasingly pricing what could happen next rather than what has already happened. If attacks begin disrupting Saudi exports or trigger a broader regional confrontation, Brent could quickly retest this year's high near $126. If diplomacy translates into verifiable de-escalation, a sizeable portion of the geopolitical premium could unwind. Until then, Brent is likely to remain supported above $110, caught between improving physical fundamentals and a fragile geopolitical backdrop. Crude Oil Fut (Oct) remains mildly bullish as prices continue to take support from the lower trendline and trade above the 200 EMA within an upward trend channel. Positive price structure suggests buying interest remains intact. On the upside, immediate resistance is placed at 9,840; a sustained breakout above this level could extend the rally towards the 10,000 zone. On the downside, the key support lies near the trendline at 9,515. A breakdown below this level may trigger a sharper correction towards 9,200. Overall, the near-term bias remains positive while prices hold above the channel support.