Quick overview
- WTI crude oil prices are currently trading below $74.05 as the market adjusts to the normalization of supply following the U.S.-Iran interim deal.
- The return of Iranian crude exports and increased production from OPEC+ and other nations are contributing to a healthier global oil supply outlook.
- Despite a positive long-term demand forecast, economic uncertainties and a strong U.S. dollar are impacting oil consumption, particularly in developed nations.
- Technically, WTI must maintain support above $74.05 to sustain its recovery, with resistance at $78.07 potentially leading to higher price targets.
WTI is still trading in negative territory because the market is adjusting to the possibility that the supply picture will normalize after the U.S.-Iran interim deal kicks in. The futures for the benchmark on July 9 traded close to the support level at $74.05, yet the contract struggled to find a new bull run. The normalization of political tensions between the two nations removed much of the risk premium that drove the crude oil rally this year, allowing investors to return their focus on global demand, output, and the future policy of the Organization of Petroleum Exporting Countries and Allies group of nations. Although the long-term demand picture looks good, the return of Iranian supply, and continued strong production from a host of top oil producing nations are still weighing on crude. For now, it seems like traders are focused on $74.05 and whether or not it holds.
Returning Supply Shifts Focus Back to Market Fundamentals
With the normalization of tensions after the implementation of the U.S.-Iran interim deal, market attention will now shift to a few core fundamental issues related to oil supply and demand. The primary focus of the crude oil market today is the recent implementation of the Islamabad Memorandum of Understanding, or the interim U.S.-Iran deal signed in June. The deal will allow commercial traffic to return to the Strait of Hormuz, allow Iranian exports to resume, and allow for new crude supplies to return to the global market. As Iranian crude cargoes begin to sail through the strait and tanker traffic continues to rise, crude production in Iran is set to increase. This additional output, in combination with rising production from other top producing nations, will lead to additional oil supplies hitting the market. Iranian crude output is set to increase into the hundreds of thousands of barrels per day. With that, fears that Iranian crude exports will be a lost supply have been alleviated. The return of Iranian exports will allow crude oil prices to return to lower levels.
In June, the Organization of Petroleum Exporting Countries and Allies group of nations also began to implement its production increase as planned. With the production agreement still set for a 188,000 barrels-per-day production increase for the month of July, the group continues to hold the potential to adjust its oil output if the market outlook weakens in the coming weeks and months. Although the alliance has emphasized its commitment to market stability, additional supply from member nations could limit near-term price recovery. However, if more supply enters the market than expected due to additional production from OPEC members, the contract may struggle to find much support in the near-term.
In addition to rising supply from OPEC+ member nations, crude supplies outside the organization are also set to increase. U.S. crude oil production continues to sit near all-time highs. With U.S. drilling activity in the U.S. remaining relatively disciplined, most major crude producing companies have decided to increase production efficiency rather than expand output over the next year. Other nations outside OPEC, like Brazil, Guyana and Canada, will all see oil production increase as well, adding to a healthy global supply picture.
While the oil supply outlook remains in a relatively healthy and strong spot, demand growth has also been a steady source of strength for the market. Despite economic uncertainty in most of the global economy, oil consumption is projected to grow by approximately 1.2 million barrels per day from its current levels over the course of this year according to the International Energy Agency and OPEC. While emerging markets have driven recent oil demand growth, developed economies have been left behind as they grapple with the effects of rising inflation, higher interest rates, and slower economic growth. Oil demand from most developed nations is expected to remain relatively flat as they focus on increasing fuel efficiency to cut costs and address environmental concerns.
The current macroeconomic backdrop has also added to a difficult supply and demand outlook for crude. High interest rates set by the Federal Reserve are currently keeping the U.S. dollar relatively strong against most major currencies. The stronger dollar has made dollar-denominated commodities like oil more expensive to buyers of those commodities in other countries. As the interest rate differential between the U.S. and most of the rest of the developed world is widened, most investors have opted to keep their capital in the U.S. market, leading to speculative trading of U.S.-based commodities to decline over the last several weeks and months.
WTI Technical Analysis: $74.05 Trendline Holds the Key
From a technical standpoint, WTI remains above a trend line that has continued to support the recent rally from the February lows of around $55. The market is hovering near $74.05, where buyers have been stepping in to prop prices up.
The major resistance stands at $78.07, which aligns with the 200-day Exponential Moving Average (EMA), which is sitting near $78.23, as well. A sustained move above this barrier could fuel bullish strength, with next targets lying at $82.24 and $87.24.
The trend line is the key support on the chart. Below $74.05, the current recovery could stall, resulting in another fall towards $72.51 then $69.90.
On the indicator side, sellers have lost some of their grip, but they haven’t completely surrendered control. RSI is at the 42 level, which shows low momentum but is out of oversold territory; in contrast, the MACD histogram just flipped slightly positive, which shows buyers trying to regain some momentum.
Crude Oil Outlook
In short, WTI oil has begun a period where fundamentals are in focus again. A combination of resuming Iranian exports, continued US and non-OPEC production, and the OPEC+ strategy of gradual supply increases has changed the market from one influenced by politics and conflict to one determined by stockpiles and growth in demand.
So, from a technical standpoint, WTI needs to remain above $74.05 to keep the big rally going. A move above $78.07 could open the door to prices rising towards $82.24 and $87.24. On the other hand, WTI prices breaking below $74.05 would further strengthen the bearish outlook, with the next price level targets sitting at $72.51 and $69.90.
Arslan Butt
Lead Markets Analyst – Multi-Asset (FX, Commodities, Crypto)
Arslan Butt serves as the Lead Commodities and Indices Analyst, bringing a wealth of expertise to the field. With an MBA in Behavioral Finance and active progress towards a Ph.D., Arslan possesses a deep understanding of market dynamics.
His professional journey includes a significant role as a senior analyst at a leading brokerage firm, complementing his extensive experience as a market analyst and day trader. Adept in educating others, Arslan has a commendable track record as an instructor and public speaker.
His incisive analyses, particularly within the realms of cryptocurrency and forex markets, are showcased across esteemed financial publications such as ForexCrunch, InsideBitcoins, and EconomyWatch, solidifying his reputation in the financial community.
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