Where now for oil as Trump abandons Iran deal?

US President Donald Trump has confirmed that the US will abandon the nuclear deal with Iran and reinstate sanctions on the country. Iran is the third-largest OPEC oil producer behind Saudi Arabia and Iraq, and the fifth-largest global oil producer when you include non-OPEC regions, the US and Russia. So what does it mean for oil prices?

IG Analyst

Publication date : 2018-05-09T11:18:38+0100

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Crude oil markets had been pricing in the potential of a US exit from the Iran nuclear deal heading into the speech in which US President Donald Trump confirmed his country would pull out, but oil prices rose further when renewed US action against Iran was confirmed.

Organisation of the Petroleum Exporting Countries (OPEC) has a deal with some non-OPEC countries, such as Russia, to reduce oil output in an attempt to curb the oversupply of crude in the global market. Current agreements keep the output curbs in place until December 2018, with a meeting scheduled to review these production agreements in June. OPEC thinks the oversupplied global market will rebalance as soon as June 2018, and the news of US sanctions on Iran will perhaps provide further credence to this forecast. The US decision on Iran will also raise fears about increased geopolitical tensions in the Middle East, which would equate to further supply constraints and a further catalyst for oil prices.

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Renewed US sanctions are expected to reduce Iranian supply by between 200,000 and 500,000 barrels a day within the next six months or so. A counter consideration is that these supply gaps could be filled by other OPEC nations, or indeed by the US where higher oil prices support higher cost production initiatives.

Oil prices – the technical view

WTI chart

WTI chart

WTI chart

The uptrend for WTI is currently being continued. The $72.70 per barrel target suggested from the previous triangle breakout is close to being realised. The parallel blue lines highlight a bullish flag chart pattern, which is now also in play. The flag pattern suggests a short-term continuation of the uptrend which preceded the flag formation.

The proportionate target derived from the pattern arrives at a further upside target of $77.25 per barrel. Traders of this pattern not already committed might hope for a pullback towards support at $68.75 per barrel for long entry, considering a close below $66.20 as the stop loss or failure level for the trade.

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