It was a busy week for oil traders, with prices moving in a $4.25 range of $71.89 per barrel down to $67.63 per barrel as the market digested the news that U.S. President Donald Trump decided to unilaterally pull out of the Iran nuclear deal and reimplement economic sanctions. The exchange of airstrikes between Iranian-backed rebels in Syria and Israel also added to the market tension.
Traders are concerned that renewed sanctions could lead to a loss of crude oil exports from OPEC's third largest producer. The return of sanctions could result in a reduction of oil exports from Iran by 200,000 barrels per day (b/d) to 500,000 b/d by the end of the year, and another 500,000 b/d to 700,000 b/d in 2019, according to S&P Global Platts. U.S. sanctions are set to take effect in November, giving market participants some time to source new supplies. China is the most significant single buyer of oil from Iran at about 700,000 b/d. South Korea comes in second at a little over 250,000 b/d.
Disruption in Iran could force OPEC to adjust up production levels earlier than it had expected and could prompt U.S. shale drillers in West Texas to drill more. Despite these efforts to fill in for lost supply, analysts at Bank of America still expect oil to reach $100 per barrel in 2019.
On Monday, traders and analysts will get a look at the latest OPEC monthly oil market report. Key data to watch for are any additional upward revisions to world oil demand. Last month, OPEC revised 2018 world demand growth to 1.63 million barrels per day. Total demand for the year is forecast to average 98.7 million barrels per day. Traders will also be looking at OPEC's world supply expectations. In last month's report, OPEC said that it expects non-OPEC supply to grow by 1.71 million barrels per day in 2018, with the U.S. accounting for most of the supply growth.
OPEC does not publish its supply growth forecasts but did say last month that OPEC crude production in March decreased by 201,000 b/d to average 31.96 million b/d. OPEC's share of the global output continues to fall as the cartel takes barrels off the market to relieve a global supply glut that caused oil prices to tumble a few years ago. OPEC market share now stands at 32.6% but could go in either direction depending on the cartel's response to Iranian barrels coming offline later in the year.
On Wednesday, the IEA will publish its monthly oil market report. Traders will again look for changes in supply and demand expectations. Last month, the IEA left global demand forecasts unchanged in 2018 at 1.5 million b/d, slightly less than OPEC's expectations. The IEA says non-OPEC supply is set to grow by 1.8 million barrels per day in 2018, somewhat more than OPEC's expectations. As it stands now, OPEC seems to be expecting a tighter market in 2018 with higher global demand and lower non-OPEC supply growth. Traders could anticipate additional upward price momentum if the IEA's views come more in line with OPEC.
The technical chart for oil still looks healthy in the long run. A weekly chart shows a well-established uptrend despite last week's volatility that left long wicks (or shadows) in the weekly price action.
The daily price chart is more mixed, however, with the completion of a Doji Star Bearish Reversal candle last Thursday. Prices struggled for direction on Thursday, resulting in a Doji candle, and closed lower on Friday. This scenario generally shows an erosion of confidence in the current uptrend that could extend into this week. Contrasting the emerging candlestick patterns is a strong vote of confidence from a mix of technical indicators and moving averages. Daily technical indicators all indicate bullish sentiment confirmed by short- and long-term moving averages.
Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as trading or investment advice.