FX.co ★ Fundamental analysis of oil on October 20, 2020

The oil market is closely watching the political rhetoric of OPEC+ and Russia once again, disregarding Donald Trump's tweets, US oil producers, the global financial crisis, China, and the greenback. Of course, this does not mean that other drivers of changes in Brent and WTI quotes are forgotten. Surely, they will come into the spotlight one day. Right now, investors are focusing on the actions of Riyadh and Moscow.

The OPEC+ meeting that took place on October 19 did not bring clarity. A source close to Bloomberg claimed that the organization was preparing to extend the agreement to cut output by 7.7 million b/d until the end of this year at least. However, the countries refrained from commenting on the issue. Saudi Arabia announced that the oil market was facing gloomy prospects due to the second wave of COVID-19, which was negatively affecting demand.

It seems that Riyadh wants to stimulate the oil market by extending the deal, while Moscow intends to reduce oil production by 5.5 million b/d. All this is closely related to the fact that Saudi Arabia, unlike Russia, needs higher oil prices in order to balance its budget. In addition, investors believe that the oil market will not be able to cope with additional 2 million b/d of supply. Consequently, the process of inventory reduction will slow down and the price of oil will fall.

Dynamics of oil inventories

Investors continue to closely monitor OPEC+ signals. Meanwhile, the price of Brent crude oil is consolidating in the range of $41.5-43.5 per barrel thanks to a stronger greenback, oil production growth in Libya, and increased demand for petroleum in China. Libya is actively restoring production after it had to suspend operations at production facilities in early 2020 due to the armed conflict. Extraction at the largest Sharara field that started on October 11, is currently about 150 thousand b/d, or about 50% of its capacity. Despite the fact that China's GDP in July-September fell short of Bloomberg's expectations of a 5.3% rise, industrial production and retail sales in October showed the best dynamics throughout the year. This allows us to be optimistic about the Chinese economy in the fourth quarter and expect China's demand for oil to remain on the high level.

The US dollar is unexpectedly incurring losses in the forex market despite the correction of the US stock indices. A stronger renminbi has a positive impact on the EUR/USD pair. The statement of ECB Governing Council member Robert Holzmann that, despite the second wave of COVID-19, no additional monetary stimulus is required has also contributed to the strengthening of the EUR/USD pair.

The inability of Brent crude oil bulls to consolidate above $43.5 per barrel will indicate their weakness and increase risks of the Broadening wedges reversal pattern formation. In case of an unsuccessful attempt to test the level, I am going to sell oil at a lower price. Otherwise, if the price breaks through the level, it will become possible to buy the instrument with the targets at $45.6 and $47.3

Brent, daily chart