While Africa is pulling oil up, Asia is pulling down, Europe is deciding the fate of Brent and WTI. The escalation of the conflict in Ukraine has brought back to the market talks of the EU joining the US and British embargo on Russian oil. Growing risks of ousting the world's leading producer from the market allowed the North Sea variety to rise above $114 per barrel. However, it was not possible to gain a foothold at this level.
Oil production in Libya fell by more than 500,000 bpd amid political unrest. The Sharara field, which produces about 300,000 bpd, was closed due to the spread of protests. The market is already so tough in the conditions of the gradual displacement of Russia, and then there is Libya. As a result, the spread between nearby Brent contracts increased to $1.15. A week ago it was $0.21.
Dynamics of Brent futures and spread between nearby contracts
The North Sea bears are supported by the tense epidemiological situation in China, which may affect the economy of the largest consumer of oil. Even if China's GDP accelerated from 4% to 4.4% in the first quarter, the COVID-19 outbreak and related lockdowns only manifested themselves at the end of March. In this regard, the data for the second quarter, most likely, will be sad, and the target of 5.5% at the end of the year is unattainable.
The World Bank also understands this, which lowered its forecast for global GDP for 2022 from +4.1% to 3.2%. The main reasons are COVID-19 and the armed conflict in Ukraine, which will lead to a slowdown in global economic growth. Europe is threatened with a recession if it joins the US-British embargo on Russian oil. French Finance Minister Bruno Le Maire said that the EU more than ever needs to stop importing oil from Russia. To which Moscow responded with a warning that bans on Russian oil would send prices skyrocketing to historic highs.
In my opinion, the Brent correction in late March and early April was associated with the de-escalation of the armed conflict in Ukraine. The opponents were building up their military potential in the Donbas and were preparing for active operations. As soon as they started, the mechanism of "battles in the East of Europe – sanctions – growing risks of production cuts – price hike" started working again. In early March, it led to the growth of quotes of the North Sea variety above $135 per barrel. What awaits us in the second half of spring?
To answer this question, you need to think about the duration of key events that affect oil. It seems to me that the political upheaval in Libya will end faster than the outbreak in China. While the armed conflict in Ukraine will not end just like that. As it develops, the risks of a ban on the import of Russian oil to the EU will grow, which until now has faithfully served "bulls" for the North Sea variety.
Technically, a break of resistance at $113.8 with a close above this level will mark the exit of Brent quotes beyond the fair value and may serve as a basis for opening longs with targets at $118.4 and $124.2 per barrel.
Brent, daily chart