WTI Oil Price Forecast: USOIL Slides Towards $84 as Iran Truce Eases Supply Fears

Quick overview

WTI crude oil fell further on Monday, heading to the $84 per barrel range, after the United States and Iran decided to halt their military engagement, causing traders to exit some of the geopolitical premium accumulated last week. Brent crude also dropped heavily, as fears about disruption to Middle Eastern supplies in the short term eased, though the benchmark briefly breached the $100 per barrel mark earlier.

The drop in price shows market sentiment shifting as it seems that a worst-case scenario no longer looks likely despite the fact that several routes remain exposed and the market is waiting for news from the Federal Reserve, US stock levels and OPEC+.

What’s Driving This Week’s WTI Price Decline?

The main factor driving Monday’s losses is geopolitics, not supply and demand. The market reacted positively to reports that Washington and Tehran have stopped their military activities for now as it reduces the risk of a wider conflict which could potentially disrupt exports. Investors who jumped on the bandwagon in last week’s rally were keen to take profits off the table.

Of course, the supply story is almost the same as last week. According to the US Energy Information Administration, 20 million barrels a day (or about 20% of global petroleum liquids consumption) flow through the Strait of Hormuz. Tanker shipping has also slowed due to security concerns. Put simply, the market is pricing out the geopolitical premium, but not the geopolitical risk itself.

What About OPEC+?

Another reason to be positive about the price of oil in the longer term is OPEC+. After the alliance approved a 188,000 b/d increase for August output earlier this week, analysts expect the group to stand firm at the OPEC+ summit on Tuesday next week. Saudi Arabia and Russia have made market stability their priority over rapid increases in production levels, so the chances of a major fall in price driven by a rise in the supply picture are slim to none.

US crude stocks were a key factor to support price action as well last week. Even though the Energy Information Administration reported an increase in crude inventories this week, commercial stock levels have yet to bounce back to the five-year seasonal average. Meanwhile, gasoline and distillate stocks remain below average levels. This points to the fact that the fundamentals are not as weak as the market might believe.

The Fed is next up on the agenda

With the headlines around geopolitics fading, markets are likely to focus on macro economics next. This week’s Federal Reserve meeting will be joined by the latest GDP and Core PCE reports in the US which will give clues regarding monetary policy over the second half of the year.

If Fed Chair Jerome Powell is seen as hawkish, the US dollar is likely to strengthen and concerns regarding growth could resurface, creating another headwind on crude oil. On the other hand, if the Fed is seen as more moderate, risk sentiment could improve in the broader markets as the focus will return to supply fundamentals.

China is another major factor to watch. As we discussed in the weekly fundamental analysis, the slowdown in Chinese refinery throughput over the past couple of months weighed on crude imports, but if there is any additional stimulus package from the central government or stronger manufacturing data, demand outlook for the largest crude importer in the world should recover.

WTI Oil Price Analysis; Ascending Channel’s Breakout to Drive Sell-off

WTI is under pressure as it fell below its rising trendline and an ascending channel indicating that the sharp upside momentum from earlier this month may be weakening. The next level to watch is the support around the $84.50 price point while the 50 EMA is at $87.10. The RSI dropped to 33, so the market is not yet oversold as bearish pressure seems to dominate.

If WTI breaks below $84.52 for an extended period, the next major target will be at $81.03, followed by $77.91. On the upside, the bulls must gain traction above $88.69 in order to stabilise sentiment. A strong move would likely see prices head towards the $93.58 resistance.

Bottom Line

Crude oil seems to have shifted its focus away from geopolitical factors and is starting to price in more expectations from the macro space. The halt in the US-Iran military activities seems to have removed some of the risk premium on price last week, though shipping disruptions and a disciplined OPEC+ policy will keep the overall supply story in favour of the market.

Expectations from this week’s Fed announcement will likely determine the next major direction of price action. If the Fed is hawkish and the US dollar is strong, WTI may stay under pressure in the short term and head back to the $81 per barrel zone. On the flip side, if the Fed is more moderate in its stance or if geopolitical concerns in the Middle East re-emerge, buyers could get aggressive again, pushing crude prices back to the $89-94 range.

ABOUT THE AUTHOR See More

Arslan Ali Butt

Lead Markets Analyst – Multi-Asset (FX, Commodities, Crypto)

Arslan Ali 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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