Europe has serious problems due to the exclusion of Russia from the oil market, but the United States also has difficulties. The embargo leads to an inflation acceleration and GDP slowdown. How will Washington handle this, and how will it affect Brent? Let’s discuss the topic and make up a trading plan.
Weekly oil fundamental analysis
Gasoline prices in the US exceeded $4 per gallon, which could cause further inflation acceleration and GDP slowdown. In this regard, the White House’s attempts to do everything possible to make oil rise even higher look reasonable. Sales of strategic reserves have not yet yielded results, as their total volume has fallen to 538 million barrels, the lowest level since 1987. There is hope for producers, but it may be balked.
The US is seriously worried that the exclusion of Russia from the oil market will cause prices to skyrocket to $150 per barrel. According to the IEA, oil production in Russia fell by 9% or 900,000 b/d in April. It will further fall by another 600,000 b/d in May. If the EU joins the embargo, production will decrease by 3 million b/d from July. In this case, Brent and WTI uptrends could recover, which does not work for the US. So instead of persuading Budapest to join the embargo, the Americans are coming up with other ideas. For example, the creation of a cartel of buyers or the introduction of import duties. These measures are aimed at creating a price ceiling that will limit Moscow’s revenues. This will also allow returning to the embargo topic in 2023.
It is worth noting that Washington is removing several restrictions from Venezuela, hoping for an increase in production in this country, and is pushing its producers to increase activity. According to the US Energy Information Administration forecasts, Permian Basin oil production in Texas will hit a record high of 5.2 million b/d in June.
The US mistake is that it is impossible to limit the oil price with an increase in supply. Moreover, according to OPEC, the growth in production does not guarantee a fall in the cost of petroleum products due to a lack of production capacity. Without a slowdown in global demand, the Brent and WTI rally is unlikely to be stopped. Let’s switch to the recession topic.
Dynamics of global oil demand
Due to the crisis in 2008, oil demand fell by 1 million b/d, and in 2009 by 1.1 million b/d, which had not happened before for 25 years. In 2020, due to the pandemic, demand collapsed by 10 million b/d. However, in 1990-1991 and 2001, the situation was quite different. Oil demand did not decline but grew at a slower pace. I believe that if the war in Ukraine does not spread to the rest of Europe, events will unfold according to the second scenario.
Thus, the United States needs either a recession or an unchanged epidemiological situation in China. The gradual lifting of lockdowns in Shanghai is the main growth driver for Brent.
Weekly Brent trading plan
In my opinion, the problems related to the exclusion of Russia from the oil market, the lifting of restrictions in China, and the absence of a recession in the global economy in the next six months create the prerequisites for the Brent rally. Even though the previous sales strategy at $113 per barrel yielded profits, use corrections to enter purchases in the direction of $118 and $118.7.
Price chart of UKBRENT in real time mode
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