Crude Oil Traders: Keep An Eye On The Middle East

August crude oil prices soared on Friday as traders scrambled to cover shorts after European leaders stabilized the region’s banking system, triggering a massive shift in investor sentiment. Although this news event was cited as the main reason for the up move, this week could see similar action as potential supply risks from the Middle East may crop up if Iran decides to rattle its saber over the start of the European sanctions.

Some traders believe that the impact of the European Union sanctions against Iran’s oil exports, effective July 1, could already be factored into oil prices. Last week, Iraq’s Deputy Prime Minister for Energy Affairs told CNBC that crude oil prices may be close to finding a bottom. “$85 to $90 for Brent…I think that’s about the bottom,” he said. If Iran follows through on its threats to close the Strait of Hormuz, crude oil price could soar.

Oversupply is still the most negative factor driving crude oil prices lower, however, if supply is threatened, shorts will continue to cover and speculative buying is likely to increase.

Technically, the August Crude Oil trend turned up on the daily chart after the market crossed the swing top at $80.92. Although previous tops at $85.89 and $87.32 are still preventing an outright breakout to the upside, the most immediate threat to the rally is a downtrending Gann angle from the $106.99 top at $85.49 Friday.

Once the Gann angle and the two tops are broken, the August crude oil contract will have a clear shot at a major 50% price level. Based on the main range of $106.99 to $77.28, the next potential upside target is $92.14.

If the financial situation in Europe remains stable this week then crude oil traders will have no choice but to focus on possible developments in the Middle East. Selling pressure is likely to be light as traders take a neutral stance rather than risk being caught on the wrong side of a news driven event.