07.03.202316:45 Forex Analysis & Reviews: Oil is out of hibernation

Looking at its February vacillations from side to side, legitimate questions could arise: is it true that China will recover rapidly in 2023, and the U.S. is showing more resistance to the Fed rate hike than one might think? Normally, good news from the world's leading economies catalyzes the Brent rally, but the North Sea variety was in no hurry to grow at the end of winter.

The surge above $86 per barrel occurred against a seemingly unfavorable backdrop. Investors were disappointed by Beijing's modest GDP target of 5% in 2023. It was even lower than the Bloomberg consensus forecast of 5.3%, although the country's leadership usually overstates targets. Their mundanity on paper means lower oil demand, but it is possible that the ruling party is overreacting. China's appetite for oil looks irrepressible, surpassing 16 million bpd and, together with India and other nations, raising the global figure to a record 101.9 million bpd.

Dynamics of Chinese oil demand

To keep prices from rising in this environment requires an increase in supply. Or, at the very least, a lack of supply problems. It would seem that Chevron's statement that despite a 5% cut in production, Russian exports are not declining eliminates these problems. In fact, however, Russia's offshore supply had fallen sharply in the week to March 3, OPEC+ is making no attempt to ramp up production, and U.S. companies are not in a position to help with that. They've been cutting investment in the industry for a long time, and now even if they wanted to, they won't be able to increase production.

What happens when investors underestimate demand and overestimate supply? Prices are falling, but this is a deceptive peak. Sooner or later, the cost of the North Sea variety will go up. Brent seems to be waking up, which is what happens in March.

OPEC production dynamics

The U.S. dollar, which rose from the ashes in February, also created pressure on oil, which due to the increase of the supposed ceiling of the federal funds rate to 5.5%, rising Treasury yields and plummeting stock indices smashed everything in its path. The foreign exchange market risks a major shift in the spring. The USD index needs another super strong U.S. jobs report with final numbers of +400K–500K to continue the rally. The weakening of the U.S. dollar will light the green light for oil.

Technically, on the daily chart of Brent, the three-touch reversal pattern worked effectively. We managed to enter longs from the levels of $83.3 and $84.4 per barrel. We stay in the buys and periodically increase them. The pivot levels of $90.5 and $94.7 are the targets for long positions. And perhaps that is not the limit. In the second half of 2023, the North Sea can reach the psychologically important level of $100 per barrel.