WTI geopolitical and summer fundamentals keep the bull’s in pocket on $57 handle

• Crude is bid on the back of rising expectations of a rate cut in the US.  
• Optimism over US-China trade talks boosting sentiment yet Iran also remains a supply risk.
• WTI bulls broke 200-DMA and meet resistance in 57.40s target.  

At the time of writing, WTI is 0.50% higher on the day, extending its run from a low of $56.88 to a high of $57.46 meeting yesterday’s suggested target, underpinned by good old fashioned summer fundamentals as well as supply risks in the Strait of Hormuz, trade talks and prospects of global easy money conditions which could help to stave off growth concerns on the demand side.  

Iran tensions propping up oil prices

Firstly, the Strait of Hormuz which lies between the Persian Gulf and the Gulf of Oman, (off the coast of Iran), providing the only sea passage from the Persian Gulf to the open ocean is keeping oil prices underpinned. After all, it is one of the world’s most strategically important choke points. At its narrowest point, the strait and its shipping lanes lie entirely within Iran and Oman’s territorial waters. About a fifth of the world’s oil, nearly 21 million barrels a day, passed through the Strait of Hormuz last year and it is at the centre of rising tensions since U.S. President Donald Trump withdrew from Iran’s 2015 nuclear deal with world powers and imposed sanctions on Iranian oil exports and other key industrial sectors.  

Conflict to date in the Strait of Hormuz

To date, there has been a series of events giving rise to conflict in the Strait of Hormuz which is likely to disrupt supply flows of oil, leading support for the price of crude:

• Iran diverted a British-flagged oil tanker to one of its ports, which the UK said was illegal.
• The UK has sent one of its warships to the Strait of Hormuz after Iran seized a British tanker.  
• US forces destroyed an Iranian drone that came close to the USS Boxer.
• The US said it was ready to carry out airstrikes after Iran shot down a US drone.
• Two tankers were damaged by explosions after leaving the Strait of Hormuz.
• Four tankers were hit by blasts within the UAE’s territorial waters.

On Monday, U.S. Secretary of State Mike Pompeo said the U.S. would help develop a maritime security plan for commercial shipping in the region. However, he also said the plan’s for development “will take more than that we wish it would take.” Today, the U.S. embassy in Berlin asked  “Germany to join France and the UK to help secure the Straits of Hormuz and combat Iranian aggression.”  

Trade talks in focus

In other geopolitical news, Chinese and US negotiators are meeting in Shanghai this week in a bid to end a deadlock regarding trade between the two counties. However, officials on both sides have dialled down the market’s expectations of any immediate progress but anything of the contrary to such pessimism should be another supporting factor for oil prices. The market is awaiting headlines today and tomorrow, but the main focus is going to be the Federal Reserve, (the Fed’).

 Federal Reserve could go either way for the Dollar and oil prices

As far as the Fed’ goes, bulls will be hoping for a mix of bullish economic outlook fundamentals and a rate cut with the potential for more this year that will make a favourable balance for bulls  of a softer dollar and economic optimism. However, a hawkish rate cut would likely see a stronger dollar and in  such a scenario, coupled with the Organization of the Petroleum Exporting Countries and the International Energy Agency, having both lowered their forecasts for demand growth, this would limit the capacity in which oil prices could ride much higher.

WTI levels

Technically, as per yesterday’s analysis, the price has indeed taken out the 200-day moving average and has reached a checkpoint in the  57.40s and the 50-day moving average which guards the 20-week moving average in the 57.70s. Bulls will then look to the 60 handle and double top in the 60.80s. On the downside, a break of support located on the rising support line of the channel at 55.80, opens 54.60, (61.8% Fibo.).