he weekend news that Iran has apparently reached a deal on reining back its nuclear capability has seen Brent prices drop sharply in early trade as markets factor in a potential lower geopolitical risk premium in the coming months.
As with everything with respect to the Middle East the situation on the ground always has the potential to surprise and there remain significant difficulties ahead given the scepticism surrounding the deal from Israel.
Questions remain about how the conditions of the deal will be overseen
so it is by no means certain the current weakness will be maintained, but given that Brent prices were trading at four week highs at the end of last week, it can be argued that markets hadn't priced in any agreement in the lead up to the weekend, and that probably explains the sharp drop today.
Furthermore the demand outlook remains cloudy given recent downgrades to global growth forecasts
which suggest that even allowing for supply concerns, demand looks likely to remain on the weak side.
The current premium that Brent prices enjoy relative to US prices hit nine month highs at the end of last week, above $16,
which suggests that the potential for that gap to narrow remains fairly high.
The gap between the two benchmarks has certainly been volatile this year
given that in July that gap came back to $0.50 its lowest level since 2010, and with US prices trading at four month lows, any further weakness in the US benchmark could well drag Brent prices down with it.
While the downside in US prices may, on the fact of it seem limited it still remains well above the lows of this year at around $86, which suggests there is scope for it to move lower.
Brent prices on the other hand are quite some distance away from their lows this year at around $97 and there is likely to remain significant support at the 200 week MA at $103.65.
Client sentiment on the two benchmarks could not be more different
with 81% of client money being placed to the short side on Brent, while on the other side of the coin 69% of client money is on the long side for WTI, which suggests that clients think that the current spread differential could well narrow in the coming days.
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