Crude oil price forecast: the US/Iran deal one step closer and US/China woes deliver one-two punch

WTI crude and Brent crude oil prices plunged lower to start the week after traders digested downbeat US and Chinese economic data. In Asia, China’s industrial production and retail sales data for July missed analysts’ expectations, with industrial production rising 3.8% y/y versus 4.6% expected and retail sales increasing 2.7% y/y against 5.0% expected. The People’s Bank of China (PBOC) cut its medium-term lending facility by 10 basis points, signaling renewed appetite to support economic growth. However, the move failed to allay recession woes among commodity traders.

The New York Empire State Manufacturing Index showed a sharp drop in general business conditions, falling 42 points to -31.3. Broad weakness in the shipments, new orders, and unfilled orders subcomponents drove the headline figure lower. According to the data, survey respondents don’t expect conditions to improve much over the next six months. The 10-year/2-year US yield curve remains deeply inverted, although equity traders bought stocks amid softening Fed rate hike bets.

Oil prices came under more pressure after news broke that Iran responded to the EU’s final draft text to restore the 2015 nuclear deal. Earlier, Hossein Amir-Abdollahian, Iran’s Foreign Minister, said a deal is within reach, granted the US is “realistic.” While hurdles remain, the United States and Iran are one step closer to an agreement, which could see Iranian oil return to the global market within months. Iran may be capable of increasing global supply by upwards of 2 million barrels per day, although it would likely take time for production to ramp up to those levels.

Amid fragile sentiment that hinges on global recession fears, the prospect of a deal will likely keep oil prices subdued. Backwardation in WTI’s prompt spread—the difference between the current and next month's contract price—has fallen to just 56 cents, the lowest since April. The decline suggests that oil prices may continue to fall. In the meantime, inventory reports from the American Petroleum Institute and the Energy Information Administration are due in the coming days. Brent prices are slightly higher through APAC trading but prices remain nearly 4% lower on the week.

WTI crude oil technical outlook

Crude oil prices broke below the 90 psychological level after falling further from the 20-day Simple Moving Average that. Prices have repeatedly failed to climb above that SMA since early July. The 61.8% Fibonacci retracement is underpinning prices but a break lower would threaten a zone of support not traded at since earlier this year.

WTI crude oil daily chart

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