The risk of lower oil supply from Iran became a reality yesterday after President Trump following many weeks of speculation made a unilateral decision to re-impose the “highest level” of economic sanctions targeting oil trade with Iran. Companies have been given 180 days to scale back trade with Iran and the estimated drop in oil supply from Q3 and onwards has been put at between 200,000 and potentially as much as 700,000 barrels/day. Much depends on the response, not only from Iran, but also from the remaining members of the group who have all expressed an interest in keeping the nuclear deal.
Crude oil has obviously rallied on the news, but the question facing traders now is how close the rally is to overextension. In my view, and from a technical perspective, crude oil is not yet overbought... but it's getting close.
From a fundamental perspective, however, oil's ability to hold onto its recent gains depends on its ability to maintain the geopolitical risk premium that has been built up due to Iranian worries and the fall in Venezuelan production.
Despite crude oils unpredictability given that is driven to a large extent by political interference and geo-risks, it looks like we have entered a $71-82/barrel range.