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The road to recovery for the global economy will be long and bumpy and bumps such as the discovery of a new strain of COVID-19 in Britain will continue to occur from time to time. The important thing is that investors will not deviate from the current path. This is typical for all financial markets and oil is no exception. Black gold recorded its worst daily performance since November after it became known about new restrictions in The UK and the closure of borders by a number of European States from the country.
Diurnal changes of oil
From October lows, Brent has gained about 40% of its value thanks to hopes for a recovery in global demand on the back of successful tests and the introduction of COVID-19 vaccines, increased interest in oil from Asian accounts and, finally, the intention of OPEC to increase production at a slower pace than initially expected. At the end of December, it turned out that the bulls have vulnerabilities, which forced some buyers to fix profits on longs and provoked a short-term pullback.
Vaccination, the victory over the pandemic and the rapid growth of global GDP is good but what if something goes wrong? Vaccines will not work as effectively as we would like. Will the population refuse vaccinations? Will new strains of COVID-19 continue to infect people? According to the WHO, the type of Coronavirus found in Britain is no less contagious than mumps. There are fewer COVID-19 strains than the flu and there is no reason to assume that vaccines will not target all of them.
The other two problems look more serious. Russia intends to discuss issues of increasing production from February at the January OPEC+ summit and Asian demand for oil is gradually fading. This is evidenced by the first sale of oil from Saudi Arabia since August at a price lower than the official one. Chinese accounts were actively purchasing black gold at the beginning of December and now their needs are met.
In my opinion, OPEC + is well aware of the consequences of a faster increase in production than the market currently expects. The cartel, Russia, and other producer countries should stabilize the situation, not worsen it. Oil demand in Asia is likely to start recovering in January-February which, coupled with the bearish trend in the USD index, should provide support for Brent and WTI.
Dynamics of oil and the US Dollar
The growth of the current account deficit, the decline in the real yield of US Treasury bonds, and the over-inflated monetary base of the Federal Reserve make the position of the US Dollar extremely vulnerable. If we add to this the willingness of investors to continue selling safe-haven assets against the backdrop of the global economic recovery, it becomes clear that the USD index does not look good in 2021. If so, then black gold should continue to rally.
Technically, the Brent weekly chart clearly shows the parent and offspring patterns of the Wolfe Wave with targets at $86.6 and $94 per barrel. The potential of the upward movement of oil is far from exhausted. I recommend using a pullback to the supports at $49.4, $48.8, and $47 followed by a rebound from them to form long positions.
Brent daily chart
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