14.07.202014:07 Forex Analysis & Reviews: Oil: time to collect stones

It is difficult to overestimate the role of OPEC+ in saving the oil market. Thanks to a large-scale reduction in production by 9.7 million b/d, 23 countries, including Saudi Arabia and Russia, managed to double the price of black gold in April-July. It's time to collect the stones. The transition to the second stage of the agreement, which provides for a reduction in the volume of obligations to 7.7 million b/d in August-December, is expected by investors with apprehension. Previously, it was assumed that global demand will continue to grow and absorb the missing 2 million b/d, however, the difficult epidemiological situation in the United States and the reluctance of California, the state-largest consumer of gasoline, to leave the lockdown, cast doubt on this. Bad news from Hong Kong, which has re-introduced strict measures on social distancing, as well as from Japan, which does not exclude the re-closure of the economy, does not add to the optimism of the "bulls" for Brent and WTI.

According to the International Energy Agency, oil production in April-June decreased by 14 million b/d. The indicator will gradually recover, including due to a decrease in the volume of OPEC+ obligations. In June, the cartel's production of black gold fell to 22.7 million b/d, the lowest level in three decades. Global supply is expected to fall by 7.1 million b/d by 2020, and then by 1.7 million b/d.

Dynamics of OPEC oil production

The IEA forecasts that global demand in the second quarter fell less than initially expected – by 16.4 million b/d. As it recovers in Asia, in particular in China, the indicator will fall short of 7.4 million b/d by the end of 2020. Indeed, China's oil imports reached daily and monthly highs in June. However, the International Energy Agency warns that due to the deterioration of the epidemiological situation, forecasts may be revised for the worse.

In such circumstances, the OPEC+ meeting is obligated to suggest in which direction Brent and WTI should move further. Optimists, including Rapidan Energy Group, believe that the market will easily absorb 2 million b/d. The consulting company estimates that global demand will grow by 18% in the third quarter to 95.7 million b/d and continue in the same vein in the fourth. As a result, world reserves of 5.6 million b/d will disappear, and prices will rise. Pessimists led by Morgan Stanley argue that due to uncertainty in the demand area, the growth in OPEC+ production will trigger a correction in the black gold market.

In my opinion, the increase in the number of COVID-19 infections and the growing risks of repeated lockdowns are bad news for both the global economy and black gold. Nevertheless, the world is on the threshold of the discovery of vaccines and effective drugs, so it is unlikely that the situation will take a threatening turn, and the US GDP will go on the path of a W-shaped recovery. If OPEC+ gives the market more than it expects, we buy Brent on the breakout of resistance at $ 44 and $ 44.7 with a target of $ 50-51 per barrel. The rollback will allow you to form longs from more profitable levels: $ 40.15 and $ 37.8.

Technically, while the quotes of the North sea variety have not fallen below the moving averages, the situation continues to be controlled by the "bulls".

Brent, the daily chart