05.04.202214:59 Forex Analysis & Reviews: Oil: Uncertainty looms in the market

The US and the EU intend to punish Russia, which leads to an increase in oil prices. This is unprofitable for the American and global economy and forces Washington to take unprecedented measures - the largest sale of oil from strategic reserves. As a result, a vicious circle arises when, after the fall of Brent quotes, their growth occurs.

The decision of the White House to sell 180 million barrels of oil within 6 months from strategic reserves, which is equivalent to 1 million b/d, or 1% of global demand, provoked a drop in quotes of the North Sea variety to a 2-week bottom. Information about the largest outbreak of COVID-19 in China, where about 25 million people were isolated, added fuel to the fire of sales. China is the largest oil consumer in the world, so the deterioration of the epidemiological situation in this country is a negative for Brent. The sales were also facilitated by the news that negotiations on a nuclear deal with Iran have reached an impasse.

At the beginning of the week, by April 4, everything turned upside down again. The topic of additional sanctions has been revived. The latter could affect EU imports of Russian oil, which would deal a devastating blow to the supply. In fact, the EU's dependence on energy supplies is so great that Brussels is unlikely to take drastic measures.

This is also signaled by the "bullish" conjuncture of the oil market. Six-month spreads between WTI near-term versus longer-term contracts are currently around $6, compared to $13 prior to Washington's announcement of the sale of oil from strategic reserves. The same applies to Brent, where the difference has returned to the levels that took place at the beginning of the armed conflict in Ukraine.

Dynamics of backwardation in the oil market

Based on the backwardation, the recovery of the upward trend for the North Sea variety looks unlikely. SaxoBank believes that Brent will trade in the $90-120/bbl range in the second quarter, given a number of market uncertainties. In particular, risk factors for buyers include progress in negotiations on a nuclear deal with Iran, which could bring an additional 1.3 million b/d to the market; allowing Venezuela to increase production; and growth in US shale oil production.

At the same time, not everyone is sure that oil will not be able to rewrite the March maximum. Vitol, the world's largest independent crude oil trader, believes the risks of a total Russian exclusion from the market are not yet fully priced in, while Goldman Sachs draws attention to a 1.5 million b/d deficit and the lowest demand-adjusted global inventories in the latest stories.

Technically, on Brent's daily chart, consolidation within the 1-2-3 model indicates high risks of the formation of the Splash and Shelf pattern. The borders of the "shelf" are located at $103.5 and $118.7 per barrel. At the same time, a break of resistance at $110.5 could be a signal to buy in the direction of the upper one.

Brent, Daily chart