FX.co ★ Oil: America supports Brent and WTI rally

When the conflict between Saudi Arabia and the United Arab Emirates arose, the Joe Biden administration called on these countries for peace, because if OPEC+ did not continue to increase production, the rise in oil prices would put a spoke in the wheels of the global economic recovery. The conflict within the alliance has been settled, but at the moment the main driver of the rally in Brent and WTI is the United States. Reports that, according to the American Petroleum Institute (API), stocks of gasoline fell by 6.23 million barrels, and stocks of black gold fell by 4.73 million barrels in the week of July 23, were a catalyst for the growth of both major grades.

The slow return of American oil producers and the high demand for petroleum products against the backdrop of the rapid growth of the US economy led to a reduction in black gold reserves. The IMF raised its forecast for US GDP for 2021 by 0.6 percentage points, to 7%, which will be the best dynamics of the indicator since 1984, if it came true.

Adjustments to IMF forecasts for selected countries

Rapid vaccinations have expectedly boosted demand for oil and petroleum products in developed countries, but developing countries remain a source of uncertainty. According to the International Monetary Fund, their economy will not grow as fast (6.3%) as it was expected in April (+ 6.7%). The outlook for China was also downgraded from 8.4% to 8.1% as Beijing rolls back some of its fiscal stimulus. In addition, in an attempt to combat the rise in commodity prices by administrative methods, China sells black gold from strategic reserves and applies punitive measures for violation of import quotas by oil refineries. All this holds back the rally in Brent and WTI but does not reverse it.

As for OPEC+, the decision to increase monthly production by 400,000 b/d is a drop in the ocean, it is unlikely to seriously change the current market situation. The cartel and its allies artificially maintain the supply shortage by not pouring additional barrels into the market too aggressively. This is a good reason for the continuation of the rally in black gold futures amid unrestrained growth in demand.

The delta variant of COVID-19 and the Fed can make adjustments to the current balance of power. According to the IMF, the unavailability of vaccines in developing countries and/or the emergence of a new, more deadly variant of the coronavirus are the main risks for the global economy. As for the Federal Reserve, the announcement of tapering the quantitative easing program by $120 billion a month after the July FOMC meeting could seriously shake financial markets, strengthen the US dollar, and put pressure on Brent and WTI.

Technically, Wolfe Waves and AB=CD patterns were formed on the daily chart of the North Sea variety. The target for the first of them is near $77.9 per barrel (projection from point 5 to line 1-4), the second - at $80.4. The upside potential of black gold is clearly not exhausted, so I recommend buying Brent with the above targets both on pullbacks with a subsequent rebound from the moving averages and on the breakout of resistances at $75.35 and $75.95 per barrel.

Brent, Daily chart