Crude oil forecast: WTI relinquishes entire weekly gain

And just like that, oil prices gave up the entire near-6% weekly gains by afternoon trading in London. Crude oil traders had been pricing in disruptions to Iranian oil in recent days amid concerns about military action in the country by the US. But it looks like Trump has decided against that - at least for now - and traders have accordingly reduced the risk premium priced in oil. With Venezuelan oil exports also set to recover, investors are taking no chances with holding any leveraged long positions. Against this backdrop, the crude oil forecast remains far from bullish.

 

Iran tensions had investors worried of supply disruptions

 

Today’s 3.5% oil price drop comes after prices had surged higher on the week, as the prospect of disruptions to Iranian crude exports had overshadowed possible increased supply from Venezuela. Oil prices advanced yesterday to the highest levels since October as traders awaited the US response to the turmoil in Iran, with reports that some personnel have been advised to leave an American airbase in Qatar unnerving investors.

 

The oil market was therefore building in some price protection against geopolitical drivers, due to the potential exclusion of Iran's exports. Iran, one of the top producers in the OPEC has been facing its biggest anti-government demonstrations in years. A government crackdown against protesters that had reportedly left thousands of Iranian civilians killed, drew a major warning from Trump of possible military action.

 

It is not clear, though, whether Trump’s warning - that any country that does business with Iran will be subjected to a tariff rate of 25% on any business conducted with the United States - still holds or not. If major buyers of Iranian oil such as China shy away from Iranian barrels, that would reduce global supplies sharply. But one country’s loss is another’s win. Venezuela for example can fill that void.

 

Supply glut worries starting to resurface again

 

Recently, oil investors had become concerned over additional crude supply hitting the market with a resumption in Venezuelan exports.

 

After the ousting of Nicolas Maduro, Trump said last week that Venezuela is set to hand over to the US as much as 50 million barrels of oil subject to Western sanctions. Initially, above-ground oil is being sold to the market. Eventually, production will likely be ramped up. I’d imagine it would take Venezuela some time to rebuild production to levels of the past. If we see a smoother recovery in Venezuelan oil output, this would be bearish for oil prices amid concerns over excessive supply of the stuff.

 

Gasoline stockpile build up not a great sign

 

Meanwhile, the latest oil inventories report from the US released yesterday wasn’t exactly bullish for crude oil forecast. Oil inventories surged some +3391K vs -1702K expected. This completely reversed the -3832K drawdown reported last week. Meanwhile stocks of gasoline jumped by +8977K vs +3565K expected. That was a huge build, make no mistake about it. And it followed a huge one last week. It suggests demand is weak, and so oil should struggle to make any meaningful gains without the help of any disruptions to supply.
 

Technical crude oil forecast: WTI levels to watch

 

The reversal of oil prices from the 200-day average near $62.00 resistance is hardly a positive sign today. Prices were now back down to test 58.80 support. Below that 57.10 is the next level of support on the daily. Long-term support in the $55-$56 range held recently, after repeated breakdown attempts. Still, an eventual breakdown cannot be ruled out, once the Iranian risk premium is taken out completely.

 

On the upside, the area around $60.00 to $60.50 is now the first key resistance zone to watch on oil prices. Above that, $62.00 and then the longer-term resistance zone of $63.60 to $65.00 area will come into focus.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R