28.12.202113:06 Forex Analysis & Reviews: Oil slow to recover

The main oil grades have added more than 50% to their value since the start of the year. However, Brent and WTI suffered a serious correction in December amid the emergence of a new strain of COVID-19. By the end of 2021, prices are gradually recovering on rumors that hospitalization rates for Omicron-infected people in Britain are 50-70% lower than for Delta cases. If this type of virus proves to be less lethal than its predecessor, it will be greeted with optimism, not only by the financial markets but also by the world economy as a whole.

Weekly oil trend

Oil traders in 2022 will be focused on COVID-19, OPEC+, and China. Hedge funds and other speculators boosted combined net holdings in Brent and WTI to 259,000 futures and options contracts in London and New York in the week by December 21. The market structure became bullish again. Spreads on North Sea near-term supply agreements have returned to a backwardation of $38 cents, compared to $10 cents contango a week earlier. Thus, at the end of 2021, optimism dominates the market. Will the situation change next year?

One factor in the resilience of the Brent and WTI uptrend was the commitment of OPEC+, which, despite calls from the White House to increase output beyond the plan, did not go along with the US. The Americans benefited from falling oil and petrol prices. This has not slowed down the economy and has slowed down inflation, which has reached its highest point in almost 40 years.

In fact, the Alliance has often exceeded its production reduction commitments. However, this is a common situation. The news was not a bearish driver for Brent and WTI.

Trends in OPEC+ countries' implementation of the plan

Saudi Arabia, Russia and other countries are likely to decide at the summit on January 4 to stick to the strategy of a monthly production build-up of 400,000 bpd. The US pressure on OPEC+ will take place in 2022, but the organization has already adapted to it and will continue to control the oil market.

Alongside its activities and Omicron, another important point is the influence of China. The world's biggest oil consumer cannot but influence prices. China's imports dropped by 7% in 2021 compared to 2020. However, while a year ago the country was building up stocks by 1.2 mln bpd, it stopped doing so in the outgoing year. Due to the monetary expansion of the People's Bank and the high growth rate of GDP, China is likely to increase its purchases of oil, which will have a favourable effect on prices.

Technically, Brent's return above fair value and the trend line of the Bump and Run Reversal pattern's first phase suggests that the worst for the bulls is over. It is recommended that the longs formed from $75.25/bbl should be held and periodically built up on pullbacks. The targets are $82.7 and $87.7.

Brent, daily chart