23.03.202113:27 Forex Analysis & Reviews: Oil passes the test of strength

No asset on the market can grow indefinitely. And oil is no exception. For a long time, prices have been running ahead of themselves, playing out the factors of the global economic recovery, improving global demand, and reducing stocks. It's time for this investment idea to pass the test of strength, and the worst daily and weekly fall in Brent and WTI since the fall indicate that the bulls are not ready for this.

Given the firm intention of OPEC+ not to increase production, it is easy to guess that the reasons for the March correction in oil prices should be sought in the area of demand. The prolongation of lockdowns in Europe and the growing risks of a decline in the growth rate of black gold consumption in China and the United States have led the market to very quickly reduce spreads between spot and futures contracts, approaching the bearish contango conjuncture. In particular, short-term futures are still more expensive than delivery agreements with a more distant date, but the difference between them is no longer 67 cents, as in early March, but only 9 cents.

Dynamics of spreads for oil futures with different maturities

The United States is trying to restart refineries after their forced shutdown due to freezing temperatures in Texas, but so far, apparently, it is not so good. Bloomberg experts expect that stocks of American oil will increase by 1.2 million by March 19. If this happens, it will be the fifth consecutive rise in the indicator or the longest series since May.

Not everything is going smoothly with the demand not only in the USA but also in China. For some time, China has ignored the threat of US sanctions and bought oil at reduced prices in Iran, but after Washington warned Beijing about retaliation, the supply of black gold from Tehran to Asia's largest economy is likely to decline.

Yet the main problem in the area of demand has to do with Europe. Prolongation of quarantines in France and Germany, suspension of the use of AstraZeneca drugs due to alleged side effects, as well as very slow vaccination in the eurozone as a whole, paint a very different scenario for oil than it was a month or two ago. As a result, the International Energy Agency (IEA) announces a 2.5 million b/d reduction in global demand forecasts for 2021, and the US Energy Information Administration expects that the global supply of black gold will exceed consumption in the second half of this year.

The IEA believes that Wall Street's calls for a bullish super-cycle for oil, including forecasts for Brent to rise to $100 a barrel, are untenable. Yes, global stocks are declining, but they continue to be at higher levels by historical standards.

Technically, as I expected, the fall below $66.6 per barrel due to the 1-2-3 pattern triggered a wave of correction and allowed short positions to be formed. At the same time, the rollback turned out to be deeper than originally anticipated. We continue to sit in shorts and watch the storms of the support levels at $61.05 and $59.5. Failed tests are a reason to take profits and turn over by opening a long.

Brent, Daily chart