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Weekly Commodity Analysis – Brent
In the news today OPEC+ said they expect the oil market to remain well-supported throughout 2022, despite Omicron causing continued disruptions globally. Central Banks monetary policy actions, especially the US Federal Reserve, are not expected to hinder the underlying global economic growth momentum. Oil demand forecasted at 4.2mln barrels per day (BPD) is unchanged, though Angola and Nigeria’s December output came in far below quotas. OPEC see any demand decrease due to higher US rates being mitigated by the Northern Hemisphere driving season which traditionally increases demand.
Last week, Oil markets experienced another week of gains, with the Feb Brent contract continuing to rise in early trading this week. Brent prices are currently up 0.89% and 4.34% this week.
The WTI and Brent price gains for last week were the largest in 6 weeks, driven by low US crude inventories at levels last seen in October 2018. The higher prices are coming on the back of serious disruptions in supply in Libya, Nigeria and Ecuador, and surprisingly strong physical demand. OECD America’s oil demand is forecast to rise 1.1mln BPD year-on-year, though COVID-19 restrictions are the biggest risk to that occurring.
The start of 2022 and the developments in Kazakhstan, as well as the unrest in Libya, added to the tight conditions in the market and that has been further accelerated by what is now happening in Ukraine and the Middle East. China is about to host the Winter Olympics and is due to have the Chinese New Year festivities which would be an increase in global demand, though reports are coming out that more COVID-19 related lockdowns are occurring which is a major concern. Faith Birol, Director of the International Energy Agency, noted that “demand dynamics are stronger than many market observers had anticipated, mostly due to the milder Omicron expectations”.
The drawdown on the US stockpiles point to increased demand as the states open up but in the previous week, cold weather in Canada and the Northern US disrupted the Keystone pipeline, causing stockpiles at Cushing to fall 2.75mb. News that Iran has been flouting sanctions by selling oil to China may not come as a surprise, but it will add more to the global supply and is something to watch as the OPEC+ nations look to meet their quotas.
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The US dollar index today tested the old support level of $95.50 and found it to be resistance. I am now expecting to see the US dollar bulls flip and go short if we close nearer to $95 today.
If the DXY were to come lower this would help support the higher oil prices and keep them above the previous market structure highs.
The ActivTrader sentiment indicator is at an extreme level of bearishness as the traders on the platform are 87% sellers to 13% buyers. This level of commitment in the retail space is a contrarian signal and expectations will be for the shorts to get squeezed.
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The daily Brent chart shows that $88 is now within reach and after that the round numbers of $90 and $100 become more feasible.
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Perhaps the weekly chart shows the price action and momentum best, with the confluence in Fibonacci targets pointing towards the $97-$100 range.
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For traders looking for an intraday entry and reduced risk, waiting for a pullback to the 200-period moving average on the H1 chart may be the best start. At the beginning of 2022, the Brent price pulled into the 200 EMA before launching higher. After that, traders could have added to or adjusted risk on the test of the 50 EMA and trailed their stop along with the 200 EMA. This is a simple trend-following strategy that would offer enough entries to get involved without over-trading whilst the daily and weekly charts were so bullish.
