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Oil Falls As Markets Price In Additional Supply

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday amid speculation that OPEC and its allies will soon raise production to offset a decline in exports from Iran following a move by the United States earlier in the week to halt all exports from the rogue nation.

OPEC and its allies including Russia have been tightening supply since January 1. This has been the primary driver of the more than four month rally. Supply tightened further when the U.S. imposed sanctions against Venezuela.

Earlier this week, the U.S. ended the waivers on exporting Iranian oil it had granted to eight major buyers. This spiked prices sharply higher to levels not seen in six months. At the time, analysts were saying that this would remove about 1 million barrels per day from crude oil from the market.

Since that initial spike to the upside, traders have had to deal with heightened volatility. However, the news has affected WTI and Brent differently.

WTI has been retreating since Wednesday’s U.S. Energy Information Administration’s weekly inventories report showed a bigger-than-expected build. Brent, on the other hand, had been rallying until Thursday. The move was fueled by the news that Germany, Poland and Slovakia had suspended imports of Russian oil via a major pipeline, citing poor quality. According to reports, the move cut parts of Europe off from a major supply route.

Since the initial thrust to the upside, prices have also been under pressure on speculation that OPEC make up the shortfall from the loss of the Iranian exports. Some analysts feel that the United States will pressure Saudi Arabia to end its voluntary supply restraint.

Additionally, earlier in the week, traders were pricing in a loss of about 1 million bpd of crude. Now traders are estimating the loss will be about 500,000 to 600,000 bpd. This is because China and India are expected to ignore the U.S. threat of sanctions for importing Iranian crude oil.

Weekly Fundamental Forecast

The oil market remains tight, but not as bullish as it was earlier in the week when traders were pricing in the loss of a million barrels per day. The sell-off represents traders making adjustments to the possibility that OPEC and its allies will make up the short-fall. Because Saudi Arabia has been cutting production more than expected, it has room to make up the loss.

Prices are likely to be under pressure until they reach a value zone or a level that represents the new expected shortfall of between 500,000 and 600,000 per day.

Essentially, buyers overshot to the upside when they thought 1 million bpd of crude oil would be removed from the market, now it looks as if the actual figure will be about half of that. This news, combined with the surge in U.S. production is making WTI the weaker of the two futures contracts.

Technical Analysis

Weekly June West Texas Intermediate Crude Oil


(Click to enlarge)

The main trend is up according to the weekly swing chart, however, the market is in a position to post a potentially bearish closing price reversal top. If formed this week and confirmed next week, this could trigger the start of a 2 to 3 week correction.

A trade through $66.60 will signal a resumption of the uptrend. A move through $55.31 will change the main trend to down. As you can see on the weekly chart, a change in trend to down is highly unlikely, but there is room for a short-term correction that should alleviate some of the excessive upside pressure.

The major range is $75.65 to $43.80. Its retracement zone at $63.48 to $59.73 is the primary downside target. This zone is controlling the longer-term direction of the crude oil market.

Weekly Technical Forecast

Based on Friday’s price action, the direction of the June WTI crude oil market next week is likely to be determined by trader reaction to the major Fibonacci level at $63.48.

Bullish Scenario

A sustained move over $63.48 will indicate the presence of buyers. If this move is able to generate enough upside momentum then we could see a re-test of this week’s high at $66.60, followed by a downtrending Gann angle at $68.15. We could see sellers on the first test of this angle, but it is also the trigger point for another acceleration to the upside.

Bearish Scenario

A sustained move under $63.48 will signal the presence of sellers. This could create a labored break with potential support angles coming in at $63.31 and $61.80. Since the main trend is up, buyers could come in on a test of these angles. If they fail then look for the selling to extend into the major 50% level at $59.73, followed by a short-term uptrending Gann angle at $59.31.

Weekly Outlook

It looks as if traders are pricing in additional supply to make up for the short-fall caused by the additional sanctions against Iran. Traders appear to be confused by the size of the expected production hikes by OPEC and its allies. Prices could retreat until they get a number in mind. In the meantime, concerns are also being raised about whether the plan to trim production can be sustained behind June with Russia already talking about raising production to help regain market share from the United States.

Essentially, it comes down to trader reaction to the zone at $63.48 to $59.73. Holding inside this zone will suggest a balance market, or even trade indecision.

Look for an upside bias to develop on a sustained move over $63.48, and a strong downside bias to develop on a sustained move under $59.73.

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