Iran’s historic nuclear deal could exacerbate excessive oil supply

by Fawad Razaqzada

The big news on Tuesday was undoubtedly the historic agreement between Iran and global powers on limiting Tehran’s nuclear activity in return for the lifting of economic sanctions, including oil exports and access to international finance. Crude prices initially headed lower on the back of this, before bouncing back as investors realised that at least some of the news was already priced in. There is a chance that oil prices may actually stage a more profound recovery from these oversold levels, though we remain fundamentally bearish on oil until proven wrong. With regards to the Iranian deal, the full implementation of the agreement is likely to take several months. What happens next is that US President Barrack Obama will need to submit the accord to the US Congress for approval. This could take a long time and there is a small risk that it won’t be approved. The easing of sanctions is also dependent on the pace at which Iran achieves its own responsibilities. But if it all goes to plan, then Iran could eventually boost its output by up to 1 million barrels of oil per day, approximately in about 6 months’ time. Make no mistake about it; this would be a huge amount of oil flooding an already-saturated market and it is difficult to see which OPEC members will compensate for it by reducing their own output. Thus, there is a big risk that the global oil surplus could increase further in the latter parts of this year which would obviously be bad for oil prices if there is no corresponding increase in demand.

From a technical point of view, the levels for crude oil are clearly established. WTI has failed to even test $54.00 which was previously a strong resistance level, so the path of least resistance remains to the downside until and unless this level is broken. But should the oil bulls manage to reclaim this handle then there is nothing much until the 100-day SMA around $55.00. Thereafter is the point of the origin of the breakout at $56.50. As before, the key support is at around $50. As well as a psychologically-important point, this level marks the 61.8% Fibonacci retracement of the upswing from the March low. But given the manner in which oil has sold off (i.e. aggressively), we wouldn’t be surprised if WTI goes on to even revisit the March low at $42.00 at some point down the line. For Brent, the key resistance levels to watch are at $60 and then at $61.30. The latter corresponds with the point of origin of the breakout. The key support area is between $54.50 and $55. This is where the psychological $55 level meets the 61.8% Fibonacci retracement of the upswing from March. If decisively broken, the next stop for Brent could be at $50.00.

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