This drop in oil prices could be short

Futures went lower on news of a deal with Iran, but the country isn't the most reliable partner in the world.

By Benzinga Nov 25, 2013 12:52PM

Image: Oil drums (© Kevin Phillips/Digital Vision/age fotostock)By Matthew McCall

The news over the weekend regarding a nuclear deal with Iran sent oil futures lower on Sunday when electronic trading opened.

West Texas oil futures fell by 1 percent immediately as Brent crude, more sensitive to the Mideast, fell by over 2 percent.

The deal with Iran is only temporary and will initially last six months. When the deal is broken down it shows that the sanctions on Iran’s sales of oil are not included, suggesting the fall in oil may be short-term. Then there is the fact that Iran is not the most reliable partner to strike a deal with. The country has little to no credibility and what happens over the next six months is anyone’s guess.

That being said, this past weekend was a big step in the right direction as far as halting the Iranian’s efforts to towards a nuclear bomb. That is the reason for oil falling, it is the market anticipating that at some point the Iranian oil will come back online and the geopolitical tensions in the region will be lowered dramatically.

The United States Oil ETF (USO) tracks the daily changes in the spot price of light sweet crude as measured by the changes in the price of the near month futures contract. The ETF has been in a downtrend since topping out at a one-year high in early September. The 14 percent drop had been halted three weeks ago and the ETF began forming a basing pattern as it traded between $33.50 and $34.25.

The low of $33.45 hit earlier this month will be a key level to watch on trading Monday and the remainder of the holiday shortened week. If the support is not held it will send the ETF to a five-month low and could spur on more selling back on the technical analysis.

Another oil ETF to watch is the United States Brent Oil ETF (BNO), which closed at a one-month high on Friday and has been outperforming USO the last couple of months. Because of its close ties to the Mideast, BNO will likely be harder hit on the Iran news and could test the November low of $40.84 in the coming week if the selling continues.

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