By Bhavik Patel

WTI Crude Oil has recovered from $86 to $93 after Saudi Arabia said it will curtail production if the US-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 looming recession and progress on US-Iran deal. There is tightness in the market but now as much as the market had anticipated 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 eroded. However not all is bad news for oil bulls. One is that the US Strategic reserve is at a 35 year low.

From Sept, the US will stop dumping their strategic reserves into the market and from next month, hurricane season is also starting. Any disruption in the Gulf of Mexico will hamper both crude and Natural Gas production.

Spare capacity isn’t there and inventories are low. Both US 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 avenues 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 reasons seem to include those capacity constraints as well as some OPEC member’s problems with boosting production at all. Russia has also not increased their production since March as it had previously committed to OPEC.

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Technically Crude has now come into neutral as it is now trading above its 200-day moving average. After 29th June, prices have for the first time closed above the 20-day moving average. Market will be keenly watching the progress of the nuclear deal between Iran and the US. We believe any deal will see knee jerk reaction to the downside but is unlikely to remain lower due to supply constraints and OPEC+ willingness to cut production. Any sharp upside is also ruled out as the US Fed is on an aggressive rate hike path and all economic indicators point to slowdown. We believe crude will trade in the general range of 7100-8200. Next week until 7300 is not breached, one can go long with stoploss of 7300 and upside target of 7800.

(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)