Crude oil risks skewed to downside

Crude oil prices have been unable to build on the large gains made during Monday’s session. Those gains were driven by increased concerns over the potential restriction of Iranian oil exports after Israeli Prime Minister Benjamin Netanyahu accused Tehran of having a secret plan to build nuclear weapons. Israel said it has evidence on Iran’s nuclear-weapons programme, which, if proved, could revoke the 2015 deal and lead to the re-imposition of economic sanctions on Iran, including restricting its oil exports. But one has to wonder what exactly Israel’s motive is given the timing of this announcement as its closest ally – the US – is meanwhile strongly considering to withdraw from the deal and re-impose sanctions on Iran. US President Donald Trump has until 12 May to make a decision. The longer he waits, the more nervous the oil market may become and thus we could see further volatile price action in the days leading up to the decision day.  Make no mistake about it, Iran is a major oil player – the world’s fifth and OPEC’s third largest producer – and what the US decides will have a big impact on prices. But you have to wonder how much of the risks Trump revoking the nuclear accord are already priced in. While not fully, we think that it is mostly in the price by now. Thus, the biggest risk as far as oil prices are concerned would be if the US were to decide against withdrawing from the deal. This would most likely cause a sharp slide in prices of crude oil. In any case, we doubt oil prices will remain elevated for too long anyway. If a decision is made against Iran, Saudi and other OPEC countries could easily boost their output to fill the void. But the real problem for the OPEC is the US. Here, oil supplies are continuing to grow and there are no signs of a reversal. Thus, once the Iranian situation is sorted, the market’s focus is likely to turn back to the US.

Brent oil technical outlook

From a technical point of view, the rally in oil prices look a little tired in the short term outlook. It has been a little over a week now that Brent has been unable to hold above the psychologically-important $75 handle on a daily closing basis. In fact, on Monday it may have even created a short-term top when its attempt to take out the previous high of $75.40/5 was quickly met with selling pressure, leading to another close below that $75 hurdle again. The momentum indicator Relative Strength Index (RSI) is also pointing to bullish exhaustion signs. The RSI, which had been in a state of negative divergence as oil made new 2018 highs recently, has just created another divergence i.e. lower low relative to underlying Brent crude prices which on Monday made a fresh higher high above last week’s peak. So, there is a possibility we may see lower oil prices in the days to come, at least from a technical perspective anyway. The short-term bias would turn bearish in the event yesterday’s low and support at $72.85 gives way now. If it does then Brent may drop to $71.85 support next, possibly even lower in the days to come towards the subsequent supports at $71.25, $69.60 and $68.80. All of these levels were previously resistance. All that being said, however, if Brent were to close decisively above that $75 hurdle then this would render any short-term bearish signals mentioned void, as this would be a further bullish development. In this potential scenario, Brent may go on to rally towards the 161.8% Fibonacci extension level at $77.10 next.