Is This Oil Rally Sustainable?

July West Texas Intermediate crude oil is in a position to post its highest close since late 2014 on Friday. The rally is being driven by looming U.S. sanctions against major oil producer and OPEC-member Iran which threaten to drive prices even higher over the near-term as traders prepare for an even tighter supply situation.

This week's speculative buying was initiated by President Trump's decision on Tuesday to walk away from the Iran nuclear deal.

On the bullish side of the coin, the U.S. plans to re-impose sanctions against Iran, which produces around 4 percent of global oil supplies. The sanctions will be taking place at a time when OPEC-led production cuts have already tightened the supply situation. Additionally, global inventories have tightened amid strong demand from Asia.

Speculators are betting heavily that the sanctions will lead to supply disruptions that will make crude oil an attractive enough asset to drive prices to $80 -$100 per barrel later this year.

On the bearish side some traders believe prices won't move nearly as high because of rising U.S. production and the possibility that other suppliers from within OPEC will step up output in order to counter the Iran disruption. This would essentially end the OPEC-led deal to trim production.

There is some chatter in the markets suggesting Kuwait and Iraq as two producers with the best ability to raise output quickly in response to any fall in Iranian exports.

Additionally, there are also some traders who believe soaring U.S. crude oil production may also help fill Iran's supply gap. According to the U.S. Energy Information Administration, U.S. production hit another record last week by climbing to 10.7 million barrels per day (bpd).

The pause in the rally early Friday suggests investors are waiting for this week's rig count. Energy services firm Baker Hughes is expected to report another weekly increase.

Monthly July West Texas Intermediate Crude Oil Technical Analysis

(Click to enlarge)

The main trend is up according to the monthly swing chart. The buying has been so strong in May that the futures contract is in a position to breakout above a major, long-term retracement zone that has provided resistance since December 2014.

The main range is $89.51 to $40.02. Its 50% to 61.8% retracement zone is $64.77 to $70.60. As of Friday, the market was trading on the strong side of this zone. A sustained move over this zone will put the market in an extremely bullish position.

If the rally continues through $70.60 then both levels will become new support.

Additional support is being provided by a steep uptrending Gann angle, moving up at a rate of $2.00 per month from the $44.98 main bottom. This angle comes in at $68.98 during May. Holding above this angle will help support the market's strong upside bias.

The inability to hold above the Fibonacci level at $70.60 will be the first sign of selling pressure. A break through the uptrending angle at $68.98 will be the next.

The market will weaken further if it crosses to the weak side of a long-term downtrending Gann angle at $66.01. This could trigger a break into the 50% level at $64.77. This price is both support and a potential trigger point for an acceleration to the downside.

Forecast

Based on the current price at $71.30 (early Friday), the direction of the July WTI crude oil futures contract the rest of the month will be determined by trader reaction to the Fibonacci level at $70.60.

A sustained move over $70.60 will indicate the presence of buyers. If this move generates enough upside momentum then we could see a move into the longer-term downtrending Gann angle at $77.76.A sustained move under $70.60 will signal the return of sellers. This could lead to a labored break with downside targets lined up at $68.98, $66.01 and $64.77.