Could US-Iran Talks Collapse WTI?

Crude prices are higher this year, with WTI up 9% YTD despite a slight pullback at the start of the week, with the focus now on geopolitical tensions ahead of indirect talks between the US and Iran in Geneva.

The Key Developments

• Crude prices rose amid geopolitical tensions, which could come to a head as US-Iran and Russia-Ukraine talks occur in parallel in Switzerland on Tuesday.
• Reports circulated on Tuesday that OPEC is considering increasing output in the summer amid higher crude prices.
• Citi suggests crude could drop by $5-10 per barrel if Russia and Iran acquiesce to deals.

Iran Nuclear Talks and OPEC Snip WTI Gains

WTI has had a somewhat volatile start to the year, first falling to the $55 per barrel range after the US captured Venezuela's Maduro and then jumping over $65 as Trump's attention turned to Iran. Prices have somewhat stabilised in February as both Tehran and Washington signal they are willing to talk after mass protests in Iran have been quelled. On Monday, WTI rose 1% to $63.51 amid price action while the US was on holiday and ahead of high-stakes talks between the US and Iran on Tuesday. Lower liquidity with the world's largest crude buyer, China, away for holiday this week, could also contribute to higher volatility in the asset. As its representatives were set to sit down in Geneva with US counterparts, Iran initiated military drills in the Strait of Hormuz, which controls around one-fifth of the global crude supply. Meanwhile, US President Donald Trump has continued to talk about his preference for regime change in Tehran.

In parallel, Ukrainian and Russian officials will also meet in Switzerland to work on a US-brokered ceasefire agreement. Although no concrete breakthrough is expected, it comes after reports that Ukraine was preparing for a national referendum on a potential peace deal and holding presidential elections. This is interpreted as a sign of optimism about ending the war and complying with Washington's pressure to hold elections. Meanwhile, reports circulated that OPEC+ was considering increasing output again, starting in April. The cartel will hold its monthly meeting in a couple of weeks to decide output levels as it prepares for peak summer demand and higher prices amid the US-Iran tensions.

Where Could WTI Prices Go?

Analysts at Citi suggest that Russian supply disruptions from the war and tensions in Iran could keep Brent trading in the $65-70 range in the coming months, prompting OPEC+ to increase output. The broker suggested that if a peace deal with Russia and a nuclear deal with Iran were to succeed, then crude prices could fall by $5-10 per barrel. This would put WTI potentially as low as $55, and return to the lows seen in January, before the Iran tensions flared up.

WTI Rangebound Around Middle VWAP

WTI failed to form a second peak at $66.50 last Wednesday, but the drop to a higher low at $62.20 suggests a pennant or triangle pattern may be developing. If the auto trendline remains firm during potential declines, crude bulls could target the upper trendline near $65. A break above both prior peaks would imply a completed pennant pattern, while a failure to get past would suggest a potential triangle if the lower trendline holds.  As the VWAP upper and lower lines appear to flatten out, however, a sideways phase with the bottom at $61.15 and the top at $65.90 may ensue.

Source: SpreadEx | Light Crude, Daily Chart