The deterioration of the epidemiological situation in the world and in the United States, the increase in the number of COVID-19 infected in certain parts of the Old World, and the return to the market of American oil producers, satisfied with WTI at $ 40 per barrel, could launch a wave of correction for black gold. Oil was helped by strong stock indices and a weak US dollar. The USD index is ready to end July with the worst result in the last 9 years, and hopes for continued fiscal stimulus faithfully serve the "bulls" on the S&P 500.
When the fundamentals of the black gold market limit the potential for an upward movement, and the external background creates a kind of safety cushion, it is not surprising that Brent is in no hurry to get out of the consolidation range of $ 41-45 per barrel for a whole month. Investors are used to rapid falls or increases in futures prices, however, this is the market nature: trends are replaced by consolidations, and trading ranges give way to new trends.
The decline in OPEC+ commitments from 9.7 million b/d to 7.7 million b/d is not the only "bearish" driver on the supply side. Genscape estimates that over the past 6 weeks, US oil companies have increased production by 1.2 million b/d. The indicator is slowly recovering. According to Financial Times experts, it will increase to 11 million b/d by the end of 2020, which is far from the record high of 13 million b/d that took place during the oil war between Russia and the United States.
Dynamics of American oil production
The situation in the sphere of demand is no less favorable. The increase in the number of COVID-19 infected in the United States has finally undermined faith in the V-shaped recovery of the US economy, and China is in no hurry to increase purchases as part of commitments to increase imports of American energy goods. Currently, the percentage of completion is 5, however, there is less and less time left until the end of the year.
As a result, the black gold market is expanding contango – a situation in which futures contracts with long-term performance are more expensive than with short-term ones. It reflects expectations of a surplus growth by September-October. If investors were worried about a deficit, they would grab contracts for the upcoming expiration dates like hot cakes.
Thus, the market environment for physical assets is becoming more bearish, and if it were not for the weakness of the US dollar, we could expect a correction in Brent and WTI. Oil is traded in the US currency, so large-scale sales of the latter provide support for black gold. At the same time, the correlation of the North Sea grade with the USD index has reached the highest levels since 2012, which indicates an increased sensitivity of the analyzed asset to events occurring on Forex.
Dynamics of correlation between oil and the US dollar
In my opinion, China will increase its activity in the field of purchases of American energy products, and the improvement of the epidemiological situation, the recovery of the world economy and further sales of the US dollar will allow us to form longs for Brent with a target of $ 51 on the breakout of resistance at $ 45 per barrel.
Brent, the daily chart