FX.co ★ Oil market recovery relies on the restoration of global demand

Saudi Arabia and the recovery in global demand are the recipes for the recovery of the oil market and the rise of Brent and WTI futures to 11-month highs. The International Energy Agency (IEA) believes that at the current price level, the activities of shale producers in the United States are profitable, but even this circumstance does not frighten the "bulls". According to the IEA, the market may need oil from the United States in the near future to close the existing gap. We are certainly talking about a deficit.

When Riyadh moved from collective responsibility to individual responsibility and announced its intention to unilaterally reduce the production of black gold by 1 million b/d in February-March, it was a pleasant surprise for fans of Brent and WTI. Unlike Russia, which is seriously worried about losing its market share due to the decline in oil production, Saudi Arabia allows its enemies to straighten their shoulders. Perhaps to the detriment of their position, but not to the detriment of income. The North Sea variety saluted Riyadh with a surge in prices to levels last seen in February when the pandemic was just beginning to unfold and seemed to be something local and fast-moving.

Almost a year has passed since then, and everyone is already used to considering COVID-19 as the main driver of pricing in financial markets. Oil is no exception. The development, approval, and introduction of vaccines have been the catalyst for the Brent and WTI rally. Investors hope that the return of people to normal life will restore global demand for black gold and allow it to soar even higher. Goldman Sachs raised its forecast for North Sea crude to $65 per barrel by summer. The company had previously believed that this level would be reached at a later date.

Even the strengthening of the US dollar, which was unexpected for the majority of the market, did not become a serious obstacle for oil. Despite the fact that black gold is quoted in the US currency, their paths do not always go in different directions.

Dynamics of the US dollar and oil

The market most likely believes that the growth of the USD index is a temporary phenomenon associated with an increase in the yield of US Treasury bonds and with profit-taking on short speculative positions on the dollar. The latter rose for several consecutive weeks and reached multi-year highs. In order to continue the upward trend in EUR/USD, it is necessary to bring the positioning in the futures market to a more normal state.

Brent and WTI are supported by expectations of a reduction in US oil reserves. According to Bloomberg experts, the indicator will decrease by 2.7 million barrels. If all this happens, we will talk about the fifth consecutive week of inventory reduction, which is a "bullish" factor for black gold. It indicates a recovery in demand in the United States.

Technically, the Brent rally towards the target of 261.8% on the AB=CD pattern continues. It corresponds to the mark of $64.5 per barrel. Since the North Sea variety reached the previously indicated target of $56.5, I recommend fixing part of the profit on long positions and increasing the remaining ones on pullbacks.

Brent daily chart