09.02.202114:00 Forex Analysis & Reviews: Interest from hedge funds fuels rally in Brent and WTI

If in 2020 investors were amazed by the speed rally in US stock indexes, then in 2021 they are surprised by the excessively fast growth of oil. The main grades of black gold have managed to recover to the levels recorded before the recession, although there is no talk of any victory over COVID-19. The pandemic continues to roam the planet, but Brent and WTI turn a blind eye to the troubles it brings.

The main drivers of oil growth are the vaccinations and the fiscal stimulus from US President Joe Biden, which should provide double support to global demand, as well as a reduction in production by OPEC and other producing countries. According to Reuters experts, oil production in the United States will not return to a record level of 12.25 million b/d until 2023. In 2020, the figure fell by 6.4%, to 11.47 million b/d. The cartel, led by Saudi Arabia, is doing everything it can to stabilize the market by cutting production.

Oil is returning to normal, but some traders find it overwhelmed with enthusiasm. In 2020, the same was said about the S&P 500, which did not prevent the US stock index from continuing its upside campaign. And yet I have to note that speculators are gradually being added to the upward trend in Brent and WTI, which increases the risks of deep corrections.

The fact is that backwardation is taking place on the black gold market - a situation in which the current value is higher than for forward contracts. The spot price gap for WTI futures to be delivered in March exceeds $5, although traders were hit by super contango when the Texas variety plunged below zero in March.

Spread dynamics of spot and futures contracts

This situation creates the preconditions for speculators to replenish the ranks of bulls. At the moment of expiration, hedge funds have the opportunity to close their obligations with a reverse (offset) transaction and immediately buy cheaper contracts with long-term execution dates.

Backwardation and the associated heightened speculative demand explain why Brent and WTI are growing so fast. Their rally is clearly outstripping the decline in global reserves of black gold, and the persistence of lockdowns in European countries limits the growth potential of global demand.

Dynamics of Brent and oil reserves

Assuming that black gold is heading upside, thanks to vaccines and hopes for a fiscal stimulus from Joe Biden, the latter's adoption by the US Congress could do a disservice to oil. No matter how its fans have to deal with the implementation of the principle "buy on rumor, sell the fact."

Thus, although the long-term prospects for Brent and WTI remain bullish, in the short-term there may be a pullback amid profit-taking by speculators.

Technically, the pivot level at $61.2 per barrel blocked the way of the North Sea variety to the target of 261.8%, indicated in early January, according to the AB=CD pattern. In the event of a breakout to the $63-64.5 per barrel area, it makes sense to gradually exit long positions amid growing risks of a pullback.

Brent, daily chart