13.07.202121:40 Forex Analysis & Reviews: Oil turns hot and cold

The oil market is facing turbulent times in the first half of July. Prices soar to 3-year highs, fall, then regain lost positions again. High volatility is in the blood of traders, but before rushing into the pool with your head, it would be nice to understand the reasons for what is happening.

Alas, reputable organizations do not help to clarify the situation. According to the International Energy Agency, the conflict between Saudi Arabia and the United Arab Emirates has led to the fact that OPEC+ production will remain at the level of July, which contributes to the reduction of global black gold reserves against the background of a rapid recovery in global demand. The latter, according to the IEA, will increase by 5.4 million b/d in 2021. This alignment of forces in the market opens the door for further growth of Brent and WTI quotes.

On the other hand, the IEA draws a parallel between the current confrontation between Riyadh and Abu Dhabi and the price war between Saudi Arabia and Russia in 2020, the goal of which was to gain a greater share in the market. If history repeats itself, the growth of supply from the UAE will increase the risks of a correction of black gold.

Thus, an authoritative organization does not allow us to clarify exactly where prices will go and what is the source of increased oil volatility. At first glance, the answer to the last question lies on the surface. The conflict between Saudi Arabia and the Emirates was initially perceived by investors as a bullish factor, which led to an increase in Brent and WTI quotes. Then the participants of the market battles considered that a split in the ranks of OPEC+ with a potential exit from the UAE Alliance would hit the authority of the cartel, and they began to sell oil. Finally, traders realized that if the allies start fighting for market share, it means that they are confident in the strength of global demand and are trying to monetize it. If so, then black gold can move up.

Dynamics of oil market volatility

From a fundamental point of view, wild fluctuations in Brent and WTI look logical, but let's not forget that people make decisions, and people are subject to emotions. Currently, the ratio of bulls to bearish positions for the Texas variety is 23 to 1. This is the highest figure since the summer of 2018. It is three times higher than five weeks ago. When the market is in this state, the slightest bit of bad news can cause fear in buyers. Longs will immediately begin to close, which is fraught with a serious rollback. As a result, the situation risks becoming unpredictable.

Something similar is now taking place in the US Treasury bond market. Net short positions are so large that closing them amid bad news causes debt yields to fall. This looks rather strange against the backdrop of a strong economy and the Federal Reserve's intention to normalize monetary policy sooner rather than later.

Technically, the Brent bulls are trying to restore the upward trend and push the quotes towards the targets for the AB=CD and Wolfe Wave patterns, which are located near the levels of $84.6 and $86.2 per barrel. A confident attack on resistance at $77.6 may become the basis for buying.

Brent daily chart