The strong US dollar, the growth of US production, the third wave of COVID-19 in Europe, the improvement of relations between China and Iran, as well as the story of the tanker stuck in the Suez Canal could not reverse the upward trend in the oil market, but added to its volatility. Black gold is poised to end its fourth consecutive quarter in the green, and investors are looking closely at the OPEC+ meeting in Vienna, the outcome of which should clarify the medium-term prospects for Brent and WTI.
Before the summit of the cartel and its allies, each of the parties with opposing views on the alliance’s strategy can claim that it was right. Russia has previously said that the unwillingness of OPEC+ to throw additional barrels on the market will lead to an increase in the activity of competitors – American manufacturing companies. Saudi Arabia has argued that it does not believe in optimistic forecasts of a victory over the pandemic and will increase production only when it sees it with its own eyes.
American black gold producers are really coming to their senses, and the third wave of COVID-19 in Europe suggests that Riyadh was right. But due to the correct strategy, including the reduction of oil production unilaterally, it stabilized the market situation.
Dynamics of oil production in Saudi Arabia
Saudi Arabia’s stance has something in common with the Fed, which intends to make sure inflation is accelerating rather than being proactive. In any case, Riyadh’s firmness suggests that the March OPEC+ meeting in Vienna will be a copy of the previous one. The alliance is unlikely to decide to dump additional barrels into the market, which would lead to a drop in Brent and WTI quotes.
If the US economy, thanks to rapid vaccination and large-scale fiscal stimulus, can accelerate to 6.2%-6.5% in 2021, which is good news for oil demand, then things are much worse in Europe. There are certain problems with black gold and from China. If in 2020 China forked out almost $500 billion to support its own economy, which led to an increase in demand for raw materials, then in 2021 Beijing decided to return to its idea of reorienting the economy from investment to consumption. Demand for commodity market assets, including base metals and oil, fell slightly, which contributed to the correction.
As for the agreement to strengthen cooperation between China and Iran, which strikes a blow at the United States, which prohibits other countries from trading with Tehran, this is more a bill of exchange than an agreement. There are no specific numbers, and Xi Jinping signed such documents in five other countries of the Middle East. The unexpectedly strong US dollar is seen as a bigger problem for black gold, but the USD index cannot grow indefinitely.
Technically, only a breakthrough of dynamic resistances in the form of moving averages, as well as pivot levels at $65 and $65.9 per barrel, will allow Brent bulls to expect the upward trend to recover. The recommendation is to keep the longs formed from $61.05 and increase them in case of a successful storming of the resistances at $65 and $65.9.
Brent, Daily chart
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.