Oil futures fell Friday as ICE Brent drifted further below $80/b on signs of European leaders appearing willing to confront the White House on sanctions being reimposed on Iran.

ICE July Brent settled 79 cents lower at $78.51/b. NYMEX June crude settled 21 cents lower at $71.28/b.

The European Commission announced measures Friday intended to protect European companies doing business with Iran from US sanctions.

In addition, the UK is seeking a waiver from Washington that would allow its energy companies to continue trading with Iran, according to Minister of State for the Middle East Alistair Burt.

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With prompt ICE Brent topping $80/b Thursday for the first time since November 2014, the price itself become the major story of the week.

Breaking above that psychologically important number caught the attention of broader financial markets, particularly coming on the heels of President Donald Trump’s decision to reimpose sanctions on Iran.

That said, there have been some aspects to recent market behavior which could diminish the bullish mood, including prompt-month Brent’s inability to close above $80/b on Thursday and Friday.

ICE July Brent hit $80.50/b Thursday, but settled $1.20 off that intraday high. Similarly, Friday’s settle was $1.36/b below its intraday high.

This dynamic, in which a contract weakens over the course of the day, hitting session lows in the afternoon without any obvious catalyst, suggests at the very least a shift in momentum.

Monday will be pivotal in assessing whether Friday’s turn lower was primarily a function of traders squaring positions before the weekend or the first stage in a longer retracement.

Another indicator belying the strength in outright prices has been the trajectory for ICE Brent’s term structure.

The July/August spread flirted with contango Friday, but flipped to backwardation late in the day to settle at 2 cents/b.

The extent of the backwardation at the front end of the ICE Brent curve peaked April 26 at 86 cents/b, but has since weakened even though outright prices rallied this month.

“Rising prices should be coextensive with a widening backwardation and instead prices are higher while the backwardation has narrowed,” said Dennis Gartman, publisher of the Gartman Letter.

“Either the price is wrong or the term structure is and we have learned that the term structure is far the better indicator,” he said.

ICE Brent’s front-month/second-month spread has been backwardated since September. Prior to that, it had been in contango almost continuously since July 2014 except for brief periods mostly around expiration.

Robert Yawger, director of the futures division at Mizuho Securities USA, said he would not draw any inference from the weaker term structure given the other supportive factors still present.

“With the OPEC cuts and Iran situation there’s definitely a degree of supply getting squeezed,” he said.

Solid crack spreads well above $20/b were also evidence of strong demand helping prop up the market, Yawger said.

The NYMEX ULSD crack against WTI reached a high of $24.87/b Friday, while the RBOB crack touched $23.45/b at one point.

Product futures followed crude lower Friday. NYMEX June ULSD fell 1.53 cents to $2.2655/gal. NYMEX June RBOB settled at $2.2333/gal, down 98 points.

–Geoffrey Craig, geoffrey.craig@spglobal.com

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