Crude Oil Prices Flirt With $90 Amid Iran Nuclear Talks, Falling Inventories

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CRUDE OIL PRICE OUTLOOK:

• Crude oil prices retreated below $90 as investors eyed the resumption of Iran nuclear talks
• US crude inventory unexpectedly fell by 4.8 million barrels last week, underscoring strong demand for energy
• Oil prices are trending higher within an “Ascending Channel”, but prices may be vulnerable to a technical pullback

Crude oil prices retreated further from their 7-year highs as investors weighed the resumption of Iran nuclear talks, which reignited hopes for more oil supply from the middle east country. Meanwhile, a surprise decline in US commercial crude inventory underscored strong demand for energy, buoying prices. WTI is trading at around $89.5 bbl during Thursday’s APAC afternoon session, and Brent is trading at $91.2 bbl.

Progress in the nuclear talks may pave the way for lifting some of the economic sanctions put on Iran during 2018, including oil export bans. This may help to ease supply constraints after OPEC+ failed to fulfil its output increase commitments. Iran’s oil exports topped 2.0 million bpd before 2018, after which it dropped substantially due to the sanctions imposed (chart below). Therefore, a revitalized nuclear agreement may remove production caps and bring as much as 2 million bpd of fresh supply to the market, weighing on prices.

Last week, OPEC+ agreed to raise output by another 400k bpd in March, but this doesn’t seem to be sufficient to ease market concerns about supply shortages. The oil cartel has been resisting pressure from top oil consumers such as the US to pump more to aid economic recovery.

Iran Crude Oil Exports – Past 5 Years

Source: Bloomberg, DailyFX

The demand for energy remains strong in the US, as the Energy Information Administration (EIA) report showed a 4.8-million-barrel drop in crude inventories for the week ending 4th February. Stockpiles have been falling for 9 out of the last 11 weeks, underscoring robust demand for energy despite rising Omicron cases in the country. This suggests that the economy is weathering the pandemic well, and oil prices may be well-supported by pent-up demand and the gradual exit from the Covid-related restrictions.

WTI Crude Oil Price vs. DOE Weekly Crude Inventory Changes

Source: Bloomberg, DailyFX

Investors will eye Thursday’s release of US CPI data, which is expected to hit a four-decade high of 7.3% on-year. If the actual reading deviates too far from the expectations, that may introduce more volatility into the market. A higher actual reading may spur fears that the Fed may be more aggressive in tightening monetary policy, boosting the US Dollar. A stronger Greenback may serve as a negative catalyst for oil as it makes the commodity more expensive to investors holding a different currency.

Technically, WTI is trending higher within a “Ascending Channel” as highlighted on the chart below. The upper and lower bound of the channel may be viewed as immediate resistance and support levels respectively. Prices are testing the lower bound for support, breaking which may result in a bearish trend reversal. The MACD indicator has formed a bearish crossover, suggesting that prices may be vulnerable to a technical pullback.

WTI Crude Oil Price – Daily Chart

 

--- Written by Margaret Yang, Strategist for DailyFX.com. 10th Feb 2022