WTI crude oil outlook: Failure to rally raises downside risk

• Iran supply risks fail to generate bullish price response
• Pakistan-Iran talks raise hopes of diplomatic path to peace
• WTI rejection and evening star flag reversal risk

If you can’t get crude rallying on the threat of Iranian barrels being removed from the market and energy exports from the Gulf being blocked, what does that tell you about where the path of least resistance may lie for crude oil in the near term?

That’s the question I and others are likely asking themselves in the wake of Monday’s unusual decline.

Perhaps helping to explain the unusual price action, Pakistan’s interior minister said on Tuesday that significant progress had been made in the latest round of talks with the Iranian leadership aimed at restoring the MoU signed with the United States earlier this year.

Donald Trump reportedly spoke with Pakistan’s army chief before the meeting, urging the Iranian regime to come back to the table and negotiate. At face value, that suggests the secondary sanctions threatened by US Treasury Secretary Scott Bessent on Monday may never be implemented should the diplomatic path become feasible again.

But as we have seen so often throughout this conflict, nothing can be assured, let alone a lasting peace that would allow energy to move freely through the Strait of Hormuz, given the repeated ebbs and flows in negotiations. As such, the latest positive headlines need to be treated with an ample pinch of salt.

Source: TradingView 

Turning to the chart, we saw WTI comprehensively rejected at downtrend resistance running from the March highs late last week. Then Monday’s unwind completed a three-candle evening star, a bearish reversal pattern warning that the rally from early August may be starting to unwind.

Now, that does not mean we’re about to see some immediate unwind. But it does make price action today important for confirmation.

The level I’m watching now is $83.60 a barrel. It is only a minor, although it has acted as both resistance and support several times this month.

A break and close beneath $83.60 would add to confidence about the prospects for a sustained extension of Monday’s move, offering a setup where shorts could be initiated beneath the level with a tight stop above for protection, targeting lower levels.

The first would be $80, where the price found support in the middle of this month. Beneath that, the next area of interest sits between $78.40 and $77.33 a barrel, with the confluence of the 50-day and 200-day simple moving averages and horizontal support at $77.50.

If WTI were to break the uptrend running from the July lows, it would bode well for a possible retest of the lows set in July, given the price has been coiling in a symmetrical triangle structure over the past couple of months.

Like the price action, the message from the oscillators is one of caution for the bulls. RSI (14) has broken the uptrend that had been in place from the August low and is now sitting only marginally above the neutral 50 level. MACD is also converging with the signal line, although it remains positive.

The broader message is that upside momentum is showing signs of dissipating, adding to the sense that directional risks may be shifting.

Of course, if I’m wrong and we see a break above downtrend resistance running from the March highs, it would point to an increased probability of an extension of the August rally, putting $87.65, $93.30 and $95 a barrel in play for longs.