WTI Crude Oil has recovered from $86 to $93 after Saudi Arabia said it will cut down production if the U.S.-Iran deal goes through. The deal will bring 1 million BPD oil to the market and before 17th Aug, crude was in free fall on fear of demand destruction because of the emerging recession and progress on the U.S.-Iran deal. There is tightness in the market but now as much as the market had expected when the West boycotted Russia and their oil.
Russian oil which was flowing to Europe and is now flowing to Asia while Middle East oil is flowing to Europe which was earlier flowing to Asia. So there is no shortage of oil which can be seen that the premium from next month’s contract has been wasted. However, not all is bad news for oil bulls. One is that the U.S. Strategic reserve is at a 35-year low.
Spare capacity isn’t there and inventories are low. Both U.S. Shale and OPEC had made their point clear that they don’t have any spare capacity due to lack of investment and so there aren’t any paths for fresh oil. OPEC+ undershot its production target by 2.9 million BPD last month after it produced 2.84 million BPD less in June.
The market will be keenly watching the progress of the nuclear deal between Iran and the U.S. Any sharp upside is also ruled out as the U.S. Fed is on an aggressive rate hike path and all economic indicators point to slowing down. We believe crude will trade in the general range of 7,100-8,200. Next week until 7,300 is not broken, one can go long with a stop loss of 7,300 and an upside target of 7,800.