FX.co ★ Oil to jump to $150 a barrel amid strong rally

The higher and the sooner the Fed raises the federal funds rate, the greater the risks of a recession. However, even a downturn in the global economy may not break the upward trend in oil. Over the past half century, there has not been such a strong tailwind for it in the form of a significant shortage of production capacity, strong consumer demand after the pandemic, the return of China after lockdowns, and production disruptions. The market is actively discussing when exactly Brent will jump to $150 per barrel, and especially aggressive bulls are talking about the $180 mark.

According to IEA forecasts, demand for oil in 2022 will increase by 1.8 million bpd. Consensus estimates of trading houses, oil companies, OPEC, and Western consumer countries for 2023 range from 1–2.5 million bpd. All figures exceeding 1 million bpd indicate the stability of the indicator. Thus, even a recession, which is evidenced both by the inversion of the yield curve in the US and by 70% of Financial Times experts, will not lead to a reduction in demand. This circumstance, in the context of continuing problems with supplies, draws "bullish" prospects for oil not only in the current, but also in the next year.

Dynamics of global oil demand growth

Yes, Moscow is actively redirecting the flow of oil from the West to the East, but this will not help it increase production. Oil traders expect that, at best, Russian production will fall to 10 million bpd, which is 10% less than before the armed conflict in Ukraine. However, most experts believe that the losses will not amount to 1 million bpd, but 2–3.5 million bpd, which, in the face of a lack of production capacity in OPEC, leads to an expansion of backwardation in the oil market. The difference between futures contracts with nearby expiration dates rose above $3 per barrel.

Indeed, according to OPEC Secretary-General Mohammad Barkindo, with the exception of 2–3 members, the possibilities of the remaining cartel envoys have been exhausted. This is most likely about Saudi Arabia and the United Arab Emirates. At the same time, the fall in production in Libya due to the political crisis from 1.2 million bpd to 100 thousand bpd exacerbates the situation that is unpleasant for the "bears" in Brent.

Curiously, the White House's appeals to American manufacturers go unheeded. It's like asking for blood from a stone. According to the forecasts of the US Energy Information Administration, oil production in the United States will grow to 11.9 million bpd by the end of 2022, but this is clearly not enough to patch the hole in the market. American companies say they can't flip the switch and return to the era of booming manufacturing with its characteristic slogan "storms, baby, storms!"

Dynamics of WTI and American oil production

Thus, the conjuncture of the oil market remains unambiguously bullish.

Brent, Daily chart

Technically, a break of the upper limit of the fair price range of $114–124 per barrel is fraught with a continuation of the Brent rally in the direction of $130 and $132. In this regard, purchases of highs, or longs on the rebound from $120, are relevant.