The year 2023 has hit hard the oil market. Russia somehow managed to keep production on pre-war levels, US oil reserves are growing fast, and finally, there it is — a bank crisis. Let’s discuss it and make a trading plan for Brent.
Weekly fundamental forecast for oil
Uptrends start due to underestimation, while downtrends develop on inflated expectations. We had high hopes for oil at the beginning of the year, expecting that China’s reopening after COVID-19 and its fast economic growth would push Brent above $100 a barrel. But in fact, the North Sea oil collapsed to its 15-month low. The Chinese GDP is reluctantly recovering, whereas problems within the US bank system have increased the recession probability.
Brent has traded at $79-87 a barrel for a long time as a stronger East and a weaker West were at tug-of-war. Bulls relied on China, and bears weren’t concerned about strong US data releases in January. The US oil reserves continued growing. An apparent inflation boost made the Fed more aggressive, strengthening the dollar and pulling down oil. Strikingly stable oil production in Russia and a rise of global reserves to 18-month peaksalso supported the sellers, allowing the International Energy Agency to talk about a market surplus.
Oil and USD charts
Source: Trading Economics.
The fight between the West and the East goes on. The OPEC kept its growth forecast for oil demand in 2023 unchanged, at 101.9 million bpd. However, they predict growth of 270 thousand bpd lower than expected for developed countries and 240 thousand bpd more than expected in developing countries. Such estimates could be based on the assumption that the bank crisis in the USA would end soon. If it flares up and developments start reminding of 2008, a recession can’t be avoided, and Brent will be sold further.
Interestingly, OPEC+ keeps calm despite the collapse to 15-month lows. No special summits are scheduled to discuss the idea of cutting output. On the contrary, the alliance has noted higher oil prices in the Middle East and is waiting for the financial markets to stop panicking. Do they think the Brent collapse is purely speculative?
It could be: high demand for treasuries could transfer capital from the oil market. Still, every medal has its reverse. Bond yields have plunged drastically, making a friendly wind for high-risk assets. That may help Brent recover in the end.
Weekly trading plan for Brent
The Fed must pronounce on the situation. A pause or an end of tightening will be a boon for stocks and oil and weaken the USD. On the contrary, further rate hikes will increase recession risks, and Brent will remain in trouble. That’s what theory says. But a 25-point increase in borrowing costs will rather calm down the markets. Amid a general stabilization of the US bank sector, Brent could grow to $79 and $83 a barrel. My advice is to buy.
Price chart of UKBRENT in real time mode
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