One who flies high has a long way to fall. Brent bulls became obsessed with purchases and were severely punished for this. What will happen next in the black stuff market? Let’s discuss the topic and make up a trading plan.
Weekly oil fundamental analysis
The lack of supply in the market leads to an increase in prices, a subsequent reduction in demand, and a drop in value. Oil is no exception. The Brent price climbed too high against the background of the armed conflict in Ukraine. Hedge funds, fearing a decline in global demand, began to exit net longs at the fastest pace since 2018. As a result, the Brent price fell by 30% from the recent highs. The collapse turned out to be so rapid that there may be a feeling that investors do not understand the scale of the withdrawal of Russian barrels from the market. If so, then black stuff can reach a local bottom.
In its latest review, OPEC did not want to adjust its forecasts. The organization stated that uncertainty makes it necessary to revise the indicators almost every day. However, OPEC acknowledged that the geopolitical conflict in Eastern Europe will accelerate inflation, reduce the purchasing power of the population and will contribute to a slowdown in the global economy and oil demand. Due to the situation in Ukraine, JP Morgan expects global GDP to expand in the first half of 2022 not by 4%, but by 2.5%. Bank of America lowered its forecast for the current year from 4.3% to 3.6%.
The situation is exacerbated by the COVID-19 outbreak in China. According to Morgan Stanley, this will not allow the economy of the world’s largest oil consumer to expand in the first quarter. Growing recession risks in Germany add fuel to the fire. In October-December, Germany’s GDP sank by 0.3%. At the same time, the most rapid drop in the ZEW Economic Sentiment Index for 31 years of record-keeping signals high recession risks in January-March.
Most likely, the US will not avoid a GDP slowdown as well. The Fed is ready to do everything possible to curb inflation, including pushing the country into another recession. However, Treasury Secretary Janet Yellen believes that the situation will not end like this. Anyway, oil is regaining its former sensitivity to the USD dynamics, which is influenced by the Fed decisions.
Dynamics of oil and US dollar
Source: Trading Economics.
Information that Russia, despite the sanctions, will continue to participate in negotiations on Iran’s nuclear program has put pressure on buyers. The arrival of additional barrels from Tehran on the market is a reason to sell Brent.
However, according to SPI Asset Management, quarantine in some places in China can be quickly lifted if Omicron cases turn out to be not so serious. The risks of COVID-19 are fading fast, especially due to the high vaccination rates of the population. In addition, the country needs to meet its 5.5% GDP target for 2022. This increases the likelihood of a new monetary stimulus package from the PBoC and boosts oil demand.
Weekly Brent trading plan
Since the negotiations between Russia and Ukraine are not very successful, it can be assumed that Brent price has reached a local low and may begin to consolidate in the range of $95-115 per barrel. At the same time, a break of the resistance at $106.5 can become a reason for entering purchases.
Price chart of UKBRENT in real time mode
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