07.01.202510:05 Forex Analysis & Reviews: Oil Fundamentals Remain Intact

Oil seems to have been spooked by its own rally. After experiencing four consecutive days of gains, Brent crude has retreated, reflecting concerns about a potential increase in oil market surplus in 2024. According to Morgan Stanley, global demand is projected to rise by 1 million barrels per day (b/d). In contrast, OPEC+ supply is expected to increase by 300,000 b/d, and output from non-OPEC countries will grow by 1.4 million b/d. Consequently, supply is set to outpace demand by 700,000 b/d, which could lead to a decline in prices. Similar predictions have been issued by other financial institutions.

Bank of America predicts that the North Sea benchmark will trade at an average of $65 per barrel in 2025, as supply growth outside OPEC+ will outpace global demand. Countries like Brazil, Guyana, Canada, and Norway are expected to flood the market with oil, while U.S. production will see more moderate growth—despite Donald Trump's "Drill, baby, drill!" mantra.

In contrast to these bearish forecasts, asset managers have been increasing their long positions in West Texas Intermediate (WTI) crude and reducing their short positions. As a result, net long positions in the Texas benchmark have reached their highest levels since August.

Speculative Positions in Oil

Buyers are increasingly confident that demand will grow faster than anticipated. This optimism is bolstered by a significant decline in U.S. crude oil inventories, indicating a bullish trend in the oil market. Additionally, Saudi Arabia has implemented its first price increase for Asian buyers in three months, and there's growing hope for further fiscal stimulus from China.

However, the market remains cautious due to the possibility that increased sanctions against Russia and Iran could lower supply volumes, which would likely drive Brent prices higher. It is noteworthy that Riyadh has shifted its strategy; rather than lowering prices to compete with Moscow in the Asian market, it has opted to raise them.

U.S. Crude Oil Inventories and WTI Spreads

The Washington Post reported insider claims that the incoming U.S. administration is considering targeted tariffs, which has contributed to a rally in Brent crude oil prices. If these tariffs are selective, they could potentially mitigate the severe global economic slowdown that is currently anticipated, leading Brent prices to surge to $77.40 per barrel.

However, to the disappointment of bullish investors, Donald Trump dismissed The Washington Post's report as fake news, asserting that there would be no lower tariffs than those previously promised. This caused Brent buyers to reconsider their positions, particularly as the U.S. dollar regained strength following its earlier decline triggered by the media report.

In my opinion, the market, weary from ongoing bearish forecasts, is attempting to shake off its negative sentiment, spurred by a series of positive news. However, we cannot overlook reality, which makes oil an appealing asset to sell during price rallies.

On Brent's daily chart, a pin bar with a long upper shadow has formed. Traders can take advantage of this pattern by placing a pending sell order at $76 per barrel, allowing them to expand their existing short positions initiated at $77.