Crude oil forecast: WTI extends rally amid US-Iran tensions

Crude oil prices rose more than 3% by mid-day in London, causing stocks and bonds to drop. Prices have rallied after Trump said Iran had been given an opportunity to reach a deal but had failed to take it. But now Trump said an unprecedented economic operation against Iran will be underway, warning of severe economic consequences for countries providing support to Tehran. Against this backdrop, the crude oil forecast remains bullish as before. That said, we could see a bit of profit-taking before the next leg up.

 

Diplomatic agreement chances dim further

 

The latest escalation pushes the prospect of a renewed ceasefire or diplomatic agreement further out of reach, while raising the risk of continued disruption to energy supplies.

 

There are some signs that underlying demand is moderating, with softer economic data from both the US and China recently pointing to slower growth. But the oil market remains predominantly supply-driven in the current environment.

 

Oil demand is relatively inelastic in the short term, meaning consumption does not fall particularly sharply as prices rise. A meaningful demand response generally requires prices to move substantially higher and remain elevated for some time. At current levels, I am not convinced we have reached that point yet.

 

That leaves the Strait of Hormuz as the critical variable. Unless the waterway reopens and supply risks begin to ease, it is difficult to see what would drive a meaningful decline in oil prices in the near term.

 

Technical crude oil forecast: WTI levels to watch

 

The bullish trend in oil remains firmly intact, given the higher highs and higher lows etc. On the hourly chart, a rising trend line continues to connect the recent lows, with the price action following a familiar pattern: shallow pullbacks, brief periods of consolidation and then another push higher. Resistance levels have been falling one after another.

 

 

Today, WTI has cleared the $85-$86 resistance area. This was previously a key resistance area on the oil price chart. Now, it could turn into support on any future dips, barring a surprise agreements between the US and Iran to re-open the Strait.

 

Should we go back below the trend line and support around $85, however, then that could make things interesting. Initial support below that area comes in around $84, followed by $83.60. A break below the latter would weaken the near-term structure and could open the way towards the $82 area, which roughly marks the point of origin of this week’s breakout.

 

On the topside, attention is now turning to the next round handles like $88 and $89, before the psychologically important $90 mark comes into focus.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R