24.10.201802:56 Forex Analysis & Reviews: Oil is ready to compromise

The growing risks of slowing global demand, Saudi Arabia's assurances of increasing oil production and closing long positions on Brent and WTI contributed to the development of a correction in the oil market. The escalation of the political conflict in Italy, the problems with the conclusion of an agreement between London and Brussels within the framework of Brexit and the slowest economic growth in China in almost a decade make us doubt the stability of the current balance in the oil market. These same factors contribute to the growth of demand for safe-haven assets, including the US dollar, the inverse correlation with which makes the "bulls" for black gold go into a deaf protection. At the same time, US reserves are not getting tired of expanding: the index exceeds its average value for five years by 2%.

If economic sanctions against Iran pushed up the quotes of Brent and WTI for several weeks, then a loud statement from Saudi Arabia on an adequate response to the American threat supported oil for several days. Investors seriously argued that Riyadh would recall the history of the 1970s and with the help of production cuts will begin to shake the nerves of Donald Trump and his team. In fact, no one is going to enter into an open confrontation with the United States, and, according to the Minister of Energy of Saudi Arabia Khalid al Falih, the country is ready to increase production by 1-2 million b/d from the current record levels. Disappointed "bulls" resulted in another wave of selling. It should be noted that speculators fold net longs on WTI for the sixth week in a row. As a result, the indicator reached the lowest level since September 2017. According to the results of the five-day period, by October 16, net long positions on Brent decreased by 14% to 409,118 fixed-term contracts.

Dynamics of WTI and speculative positions on oil

Along with Saudi Arabia, Iraq is optimistic about its potential. The world's fourth largest oil producer produces a record 4.78 million barrels per day and is ready to increase to 5 million barrels per day in 2019 and to 7.5 million barrels per day in 2024. If we add to this the increased activity of American shale producers and Russia, the picture of the black gold market begins to acquire a "bearish" shade. Moreover, according to 500 Reuters experts, 70% of the world's 44 largest economies will reach their ceiling this year. If so, it makes no sense to bet on the accelerated growth of global demand.

What about the sanctions against Iran, which have served the bulls faithfully over the past few months? According to US Treasury Secretary Steve Mnuchin, this factor has already been taken into account in futures quotes. Judging by the closure of speculative long positions, it is so. However, time will tell.

Technically, on the daily chart of Brent, the implementation of the "Splash and Upside Spread" pattern continues. Only a breakthrough of the lower boundary of the upward trading channel will create prerequisites for breaking the "bullish" trend. In the meantime, there is a high probability of a rebound from the convergence area of $ 75-77 per barrel.

Brent, daily chart