The Talks Can Go Either Way
The talks between the two nuclear powerhouses can go either way, and that’s what the price action is showing us on the weekly chart. The talks were described as “good” by an Iranian diplomat, according to Reuters, which is probably the reason for the price cap. If they continue to talk and a formal agreement is drawn up, then prices could retreat into support.
However, there is always the risk that talks collapse, leading investors to begin pricing in a possible military strike by the U.S. Navy. Furthermore, Iran could retaliate by attacking U.S. interests around the world, or even jamming up the Strait of Hormuz, which is responsible for 20% of global supply.
The Supply Risk: $10 Up or $10 Down
It all comes down to supply at this time. The upside potential is clear if the talks collapse, the U.S. attacks, Iran retaliates, and the Strait of Hormuz is blocked. We could be looking at a $10 surge in prices if everything lines up as described.
On the downside, we could see a $5.00 to $10.00 collapse if Iran and the U.S. agree to terms and the U.S. Navy starts to pull out of the region.
Other Factors in Play
Other factors that could influence the price action include the U.S. Dollar, which is going to be moved by labor market data, Fed expectations, and overall market sentiment. A cheaper dollar could lead to increased demand for dollar-denominated crude oil, while a strong dollar can cap demand.
Traders will also be watching U.S. inventory levels after a bigger-than-expected decline provided surprise support last Wednesday. Of course, any news on Russian supply can also be a source of volatility.
