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Oil Sinks to 6-month Low on Prospect of Iranian Supply

Oil Sinks to 6-month Low on Prospect of Iranian Supply
Crude Oil Chart

Oil Sinks to 6-month Low on Prospect of Iranian Supply

Oil price was down 2.89% versus $86.83 earlier on Tuesday and traded to a new six-month low of $86.69 amidst the expectation that Iranian supply will hit the market.

The market extended the downward spiral today after the European Union declared that Iran’s response to the blueprint for reviving the 2015 deal was constructive. The market is also affected by fears of a significant slowdown in the Chinese economy, putting a dampener on the commodity markets

In a note, Mizuho Securities Robert Yawger said oil is staring at the abyss here, with no obvious support level from previous wave low from December 2.”  Analysts noted crude oil had already traded below all moving averages and the retracements.

The prospect of new Iranian barrels hitting the global market comes just as Saudi Aramco announced plans to increase production, and EIA Crude Oil storage hits the highest levels since December.

The Iranian barrels also threaten to hit the market just as the Chinese economy shows significant demand destruction from the country’s Zero Covid-19 policy.

Yawger noted that WTI Crude Oil RSI was 35.96, implying there is still room to roam to the downside before the market trades to RSI oversold levels below 30.0. Meanwhile, Yawger noted, that the September/October spread was down 0.11 and trading on the eight-month low versus +0.45. READ: Fixed Income Investors Stay Bullish on Government Securities

The WTI front of the curve spread had not traded below 0.45 since May/June traded to a low of +0.25 the day before expiration on April 19. September futures expire on August 22, with October rolling to the front of the curve on August 23.

The second spread October/November was trading +0.39. Yawger said: “Spreads are contracting, the curve is flattening, and backwardation is threatening to switch to contango.

Contango is a bearish market structure. Once the contango is greater than the cost of carrying, traders can buy the front of the curve, and sell them back, theoretically getting paid to store crude oil (or any other commodity in contango, for that matter).”

Also, Yawger noted second month 25 delta put to call ratio was now 7.10% to the put versus 6.58% just this morning. “Other than the mystery spike to the put to levels over 10% for one day in July, this is the highest level to the put since at least January.”

Obviously, Yawger said, the market is on the slide on China’s demand destruction, Saudi increase in production, and Iran deal chances still alive. But 7%+ is a big number, he added. Yawger noted September options expire tomorrow.

Still, the September 85 put versus September futures trading 87.37 was trading 0.50 on a daily volume of 8,534 contracts.

Yawger is looking for an EIA Crude Oil storage draw of 1.0 million and a Gasoline storage build of 2.0 million, noting last week’s increase in the refinery utilization rate of 3.30% points to 94.3% of capacity implies that refiners will be burning through a lot of Crude Oil to make a lot of Gasoline. # Oil Sinks to 6-month Low on Prospect of Iranian Supply

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