Oil outsmarts traps

The initial impression is deceptive. Investors didn't immediately believe that oil production cuts by Russia and Saudi Arabia would lead to an increase in futures prices. Initially, this move was seen as a game played by the leading producers, but we cannot escape the truth. The joint efforts of Moscow and Riyadh pushed Brent prices to their highest levels since April. The Middle Eastern oil grade Dubai rose even faster, making its spread with the North Sea counterpart negative. At the beginning of the year, there was talk of a $3 per barrel premium. This makes Brent purchases more advantageous for Asian clients and could impact Russia.

Equally deceptive is the initial impression of China's July imports drop in dollar terms by 12.4% and exports by 14.5%. The actual figures fell short of Bloomberg expert forecasts, triggering yet another wave of concerns about the future of the Chinese and global economies. For oil, this signifies weaker demand, confirmed by an 18.8% drop in deliveries to China compared to the previous month, down to 10.29 million barrels per day. However, when considering the 17% annual growth rate and the fact that June's imports were the second-highest in history, Brent sales might appear excessive.

Especially since the market situation for oil in China is on track to improve in the second half of the year. The peak of the construction season falls in September, and increased travel during the summer will boost demand for gasoline and diesel fuel. These factors allow us to view the decline in Brent as a temporary phenomenon and continue to adhere to the strategy of buying the North Sea grade on pullbacks.

Markets are driven by expectations, so the medium-term prospects for oil continue to look bullish. However, the long-term investment horizon is a different matter. The rapid rise of Brent and WTI over the past 6 weeks increases the risks of accelerating U.S. inflation. This will prompt the Federal Reserve to resume the cycle of monetary tightening later in 2023. As a result, the risks of a recession in the U.S. economy will increase, which is bad news for global demand for oil.

Nevertheless, for now, North Sea grade buyers have little reason to worry. The U.S. economy stands firm, the Fed is approaching the end of its monetary tightening cycle, and China is not as bad as it may seem at first glance. When you add Russia and Saudi Arabia's production cuts to the positive macroeconomic backdrop, it becomes clear that bulls dominate the market. Well, let them enjoy their success.

Technically, doubting the sustainability of Brent's upward movement is unnecessary. Declines in quotes towards the moving averages followed by rebounds from them should be used to form long positions. The target levels for long positions remain at $89 and $92 per barrel.