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The oil market is full of mysteries. U.S. companies have drastically reduced investment in production, suggesting lower supply and higher prices. But prices are falling! Western sanctions were supposed to hit Russian exports, and strong U.S. macroeconomic data for January should have stimulated demand. Instead, oil reserves in the United States are increasing, and Brent has fallen below $79 per barrel for the first time since the beginning of the year. The U.S. dollar failed miserably due to the bankruptcy of the SVB, which on paper means a higher cost of oil, but it breaks all ties! What's the matter? Have the markets gone crazy?
In fact, oil is an indicator of the health of the global economy. And its health is clearly not good. For a long time, Brent has been trading in consolidation as investors were choosing between the East, led by China, which is ready for a rapid recovery, and the West giving alarming signals. After deflation began to smell in China, it became clear that the "bears" were pulling the strings. Inflation cannot be weak in a strong economy! Chinese consumers continue to be cautious after exiting lockdowns, which deprives the North Sea grades of important support and forces the reversal risks down to their lowest level since August.
Brent Reversal Risk Dynamics
Sellers clearly outnumber buyers in the options market. Investors are more concerned about slower demand growth than supply issues, which results in the peak of Brent. Indeed, with Saudi Aramco predicting that oil consumption will reach a record 102 million bpd in 2023, worrisome signals of an imminent U.S. recession are undermining optimists' positions. The bankruptcy of the 16th largest U.S. lender suggests that something is broken because of the Fed's aggressive monetary restriction. More precisely, the banking system. And the more actively regulators try to save it, the more it scares the financial markets.
The volatility of oil is not diminished at all by the guaranteed return of SVB deposits, 90% of which were actually uninsured. Let the U.S. labor market continue to look monolithic, but if the volume of bank lending goes down sharply, a slowdown in the economy cannot be avoided. Most likely, the recession, which the yield curve has been signaling for a long time, is just around the corner, which negatively affects the demand for oil and pushes futures down.
Dynamics of oil volatility
Oil is unlikely to be helped by speculation that the Fed may keep the federal funds rate at 4.75% in March, although a couple of days ago, investors believed in +50 bps. Combined with falling Treasury yields, this weakens the U.S. dollar. Nevertheless, the suspension of the cycle occurs due to the crisis, and the crisis in the economy is always for oil.
Technically, the inability of the Brent bears to win back the three-touch pattern is a sign of their weakness. Falling below the $79.2 per barrel pivot level or rebounding from resistances at $81.75 and $82.7 are reasons to sell.
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