Brent Crude Drops as US Pauses Sanctions But Downside Limited as Ukraine, Libya Concerns Linger

Daily Forex Technicals | Written by Forex.com | Jun 05 14 11:55 GMT

Brent Crude Drops as US Pauses Sanctions But Downside Limited as Ukraine, Libya Concerns Linger The price of Brent crude oil fell sharply yesterday and is a touch weaker this morning, trading around $108 per barrel. Prices fell after the US announced it would suspend its sanctions on Iran's oil sales for six months. In return, Iran has committed to take steps that halt or roll back on its nuclear program. The announcement means Iran will be able to add to the already-saturated oil market. According to a recent Bloomberg survey, output from OPEC rose by 75,000 barrels a day to an average of 29.988 million last month, led by Angola and Saudi Arabia. Although the International Energy Agency (IEA) recently suggested that further OPEC oil increases will be needed to meet demand during the second half of the year, the latest economic pointers from China and the eurozone have been somewhat lacklustre - although in saying that today we found out that factory orders in Germany and retail sales in the single currency bloc both increased more than expected in April. Nevertheless demand for oil may not necessarily increase in the same way as envisaged by the IEA. Thus further output increases from the OPEC - which appears more likely now that some of restrictions on Iranian oil exports have been lifted - could simply add pressure on crude prices. However the downside for Brent oil prices will likely be limited. For one thing, the situation in Libya is unlikely to be resolved any time soon. Most of the oilfields and oil export terminals in the country are still under the control of the rebels who are refusing to back down. According to Reuters, Libya's oil exports could fall to "zero" in a matter of days as the state oil company, National Oil Corp, could be forced to divert the only remaining oilfields - Al Jurf and Bouri - to the Zawiya refinery, which provides domestic gasoline to Tripoli. Meanwhile the crisis in Eastern Ukraine continues, prompting G7 leaders to again warn Russia of fresh sanctions for its "continuing violation" of Ukraine's sovereignty. However, unless the fresh sanctions have immediate impact on Russia's energy exports they are unlikely to cause any major reaction in prices. The fundamental outlook for Brent oil prices therefore remains stable-to-slightly bearish, a view which is also shared by the technicals. As can be seen on the weekly chart, below, Brent prices have been consolidating in narrowing ranges in recent times in a pennant-like formation. As a result, the 200-day moving average has flattened out and is currently sitting just shy of $109 - some $1 higher than the underlying price of Brent today i.e. $108. Interestingly this $108 level corresponds to the long-term upward sloping trend line that goes back several years. Although Brent has broken below the trend on a couple of occasions in the past, it has managed to remain above it on a weekly closing basis. However trends are there to be broken and if we do get a decisive weekly close sub-$108, a run towards a short-term trend and support at $105.50 could be on the way. And if that level gets broken too then we could soon be talking about 100 bucks for a barrel of Brent oil. Likewise, a potential break above the upper resistance trend line ($111) could pave the way for some major gains