June West Texas Intermediate crude futures are trading flat-to-lower as we approach the end of the week. Volume has been light all week with traders refusing to commit to either side of the market ahead of next week’s major decision on whether to reimpose sanctions on Iraq.
Supporting the market over the near-term has been speculation that new U.S. sanctions against Iran would lead to a disruption in supply which would further tighten global supplies. Iran’s oil exports hit 2.6 million barrels per day (bpd) in April, according to the Oil Ministry, a record since the lifting of sanctions.
Gains have been capped, however, by a stronger U.S. Dollar, which affects demand, and rising U.S. production.
The uncertainties over Iran are helping to underpin prices with buyers coming in on weakness, but refraining from buying enough to drive the market through resistance and into new multiyear highs. This is holding the markets in a range and giving the appearance of a sideways trade.
President Trump has until May 12 to make a decision about the sanctions. Some of the recent surge in prices is being attributed to bullish speculators who are betting that the president will make good on his threat to withdraw from the deal. This is likely to disrupt supply which could be supportive for prices moving forward.
Comments from Iran’s foreign minister triggered a volatile short-covering rally on Thursday after he said U.S. demands to change its 2015 nuclear agreement with world powers were unacceptable.
Trump and traders are waiting for the Europeans to hand Trump a plan to save the Iran nuclear deal by the end of next week. However, the situation remains uncertain enough that buyers are willing to come in on dips.
If the Europeans can come up with a plan that satisfies Trump then prices are likely to break sharply on speculative profit-taking and shorting. If Trump moves forward with sanctions then prices could rise, but gains are likely to be limited by rising U.S. production.
In other news, crude prices fell at mid-week after the U.S. Energy Information Administration reported a surprise build of 6.2 million barrels in the week-ending April 27. Traders were looking for a build of only 1.0 billion barrels. Traders shrugged off the news because the surprise rise in inventories was largely concentrated on the West Coast where supply jumped nearly 5 million barrels.
Gasoline stockpiles also climbed by 1.2 million barrels for the week, while distillate stockpiles fell by 3.9 million barrels, according to the EIA. Traders were looking for a supply decline of 1 million barrels for gasoline, while distillate stockpiles were expected to be down by 1.3 million barrels.
Monthly Technical Analysis
(Click to enlarge)
The main trend is up according to the monthly swing chart. A trade through last month’s high at $69.55 will reaffirm the uptrend.
The trend is in no danger of changing to down, but there is always the possibility of a closing price reversal top because of the prolonged move up in terms of price and time.
June begins with the futures contract trading inside an intermediate retracement zone at $64.40 to $70.34. This zone is controlling the longer-term direction of the market.
The primary upside target and potential resistance zone is $72.88 to $80.82.
Monthly Technical Forecast
Based on the early price action in May, the direction of the market the rest of the month is likely to be determined by trader reaction to a pair of Gann angles at $66.48 to $66.60.
A sustained move over $66.60 will indicate the presence of buyers. If this move generates enough upside momentum then look for a move into the Fibonacci level at $70.34. We could see a technical bound on the first test of this level, but if it is taken out with strong buying, the move could extend into the major 50% level at $72.88.
The monthly chart begins to open up on a sustained move over $72.88. Strong buying could trigger an acceleration to the upside.
A sustained move under $66.40 will signal the presence of sellers. If this move attracts enough sellers then look for a spike into the 50% level at $64.40.
The 50% level at $64.40 is the trigger point for an acceleration to the downside. The monthly chart indicates there is plenty of room to the downside under this level.
As a technician, I usually believe the technicals precede the fundamentals, but the current price action suggests the fundamentals will dictate the next move.
We know about the May 12 deadline on the Iran decision, but there is always the possibility of a surprise announcement so investors will have to be prepared at the start of trading next week.
Basically, it comes down to this. If the sanctions are imposed then look for buyers to try to drive the market through $70.34. If the deal is kept intact then sellers may take a shot at $64.40.
The monthly chart indicates the way of least resistance is down so taking out $64.40 could produce the biggest move. Any rally through $70.34 is likely to be limited because potential resistance at $72.88. The buying would have to be pretty strong to take out this level.
This assessment also makes sense because rising U.S. production can both limit gains and drive the market sharply lower.