28.09.202114:59 Forex Analysis & Reviews: Oil makes new friend

The global energy crisis pushed oil prices to 3-year highs. Increased competition for natural gas between Europe and China, which is gradually switching from coal, coupled with problems with the production of this commodity, led to a record price hike. As a result, it became cost-efficient to replace gas with fuel oil and other refined products, which increased the oil demand and contributed to the growth of Brent above $80 per barrel. And that's not the limit!

According to Goldman Sachs, oil inventories are declining much faster than the bank had previously estimated, making it possible to raise its forecast for the North Sea grades from $80 to $90 a barrel by the end of 2021. British Petroleum expects global oil demand to recover to pre-pandemic levels in the third quarter of 2022, and there are growing rumors in the market that OPEC+ will have to increase production not by 400,000 barrels per day, but by a larger amount to curb growth in oil prices, which is detrimental to the global economic recovery.

The problem is that the colder the winter in the Northern Hemisphere, the better the chances are that Brent and WTI will continue to rally. The limitations of the broader energy markets are meaningful for oil. Switching from natural gas to oil in this business for power generation is very likely, allowing traders to speculate for how much exactly global oil demand will increase. By 500,000 barrels per day or even 1 million? With supply problems in North America, this is crucial for both inventories and prices.

Oil and natural gas trends

According to DNB Markets research, Hurricane Ida caused a shortage of about 30 million barrels, and the damage could rise to 55 million barrels before production in the Gulf of Mexico is fully recovered.

The world's leading central banks confidence that the economy has weathered the pandemic favorably impacts on demand. The global economy is returning to its normal state allowing monetary policy to be normalized. The People's Bank of China said it would not allow a bedlam in the real estate market, and the World Bank raised its forecast for China's GDP for 2021 to 8.5% from 8.1%, citing Beijing's successful fight against COVID-19.

The energy crisis, the belief in the acceleration of the Chinese economy and the return to ordinary lifestyles as well as the problems with oil supply in North America after hurricanes in the Gulf of Mexico led to the growth of Brent quotations to the 3-year highs. The rally has a good chance of continuing if the winter in the Northern Hemisphere is colder than expected. This may lead to a further increase in the cost of natural gas and its substitution for oil products.

Technically, after reaching the first target of the Wolfe Waves pattern near $77.2 per barrel, the bulls have confidently moved on and almost approached the second target at $81. The rally towards $83.9 and $87 per barrel may continue. This makes it possible to keep previously formed longs and set more of them during pullbacks.

Brent intraday chart