Oil outlook: Israel-Iran agree on a ceasefire

Since our last report, oil prices have moved lower. In today’s report, we are to have a look at some key issues that tend to tantalise oil traders, primarily related to the recent geopolitical developments in the Middle East the release of the US PCE rates tomorrow and the recent developments in Pakistan. We are to complement the fundamentals with a technical analysis of WTI’s daily chart.

Israel-Iran agree to a ceasefire

In our last report, we correctly noted that “we would not be surprised to see a limited military involvement from the US, either by supplying their bunker buster munitions to Israel or using their B2 stealth bombers to destroy the Furdow nuclear facility in Iran”. The aforementioned scenario is what transpired since our last report, yet for now Israel and Iran appear to have signed a ceasefire agreement. The agreement was signed earlier on this week, specifically Tuesday morning which alleviated market worries, yet that was almost immediately violated by both sides. However, the US President appears to have stepped in and diffused the situation, with both sides appearing to be upholding the ceasefire agreement since Tuesday. In turn the easing of tensions in the Mid-East may have alleviated market worries about a possible oil supply crunch, which may have also incurred if the vital oil artery located in the Strait of Hormuz was impacted. In turn, the easing of market worries in the region, may have weighed on oil prices. In our view, the ceasefire may be upheld, yet should no decisive evidence be shown that Iran’s nuclear program has indeed been set back significantly, it may lead to a fresh round of missile barrages between Israel and Iran. Although, with both sides claiming “victory”, the hostilities may cease for now.

US PCE rates due out on Friday

The PCE rates or May are set to be released tomorrow. In particular, the Core PCE rates on a year-on-year level are expected to accelerate from 2.5% to 2.6% in addition to the PCE rate on a year-on-year basis from 2.1% to 2.3%. Taking into account that the Fed’s favourite tool for measuring inflationary pressures in the US economy are the PCE rates, the financial releases could aid the greenback, as it may increase pressure on the Fed to refrain from cutting interest rates in the near future. Moreover, should the PCE rates come in as expected or higher, we would not be surprised to see policymakers adopting a slightly more hawkish tone, which could weigh on oil prices as a more restrictive economic environment could dampen oil demand. Whereas should the PCE rates showcase easing inflationary pressures in the US economy, it may aggravate calls for the Fed to resume it’s rate cutting path, which may aid oil prices.

Pakistan on the path to develop ICBM’s capable of reaching the US?

This week, various media outlets have reported that Pakistan is attempting to develop Intercontinental Ballistic Missiles which could be capable of reaching the continental United States. Moreover, given Pakistan’s status as a nuclear power, the development of an ICBM which is capable of reaching the US may force the US to classify Pakistan as a nuclear adversary. Furthermore, considering the recent actions taken against Iran, it may lead to a confrontation between the US and Pakistan. Moreover, considering the recent hostilities between India and Pakistan, such a development may not be taken lightly from India and could thus escalate tensions in the region. Overall, should it become apparent that a military action may occur against Pakistan, it could disrupt the oil supply chain in the region and could thus aid oil prices. On the other hand, if the status quo remains it may not influence oil prices. In our view, Pakistan’s possible development of an ICBM may warrant closer attention in that particular region

Technical analysis

WTI Cash daily chart

Support: 62.75 (S1), 59.45 (S2), 55.20 (S3).

Resistance: 65.25 (R1), 70.10 (R2), 73.70 (R3).

WTI’s price appears to be moving in a downwards fashion after obliterating our S1 and S2 support levels since our report last week which have now turned to resistance respectively. We opt for a bearish outlook for the time being and supporting our case is the MACD indicator below our chart with the MACD line crossing below the Signal line. Moreover, the commodity’s price has cleared our upwards moving trendline and cleared our prior S1 and S2 levels. Yet the RSI indicator currently registers a figure near 50, which tends to imply a neutral market sentiment. Nonetheless, for our bearish outlook to continue we would require a clear break below the 62.75 (S1) support level, with the next possible target for the bears being the 59.45 (S2) support line. On the other hand, for a bullish outlook we would require a clear break above the 65.25 (R1) resistance line with the next possible target for the bulls being the 70.10 (R2) resistance level. Lastly, for a sideways bias we would require the commodity’s price to remain confined.