04.10.202212:59 Forex Analysis & Reviews: Oil challenges OPEC+

At first glance, the fall in oil prices below the levels that took place before the armed conflict in Ukraine looks paradoxical. The main grades of black gold lost a quarter of their value in the third quarter, despite the fact that world reserves are at a low level, American companies are not increasing production, there are fewer buyers for Russian oil, and OPEC+ is going to announce production cuts at its first face-to-face summit since the start of the pandemic. The expectation of the last event allowed the Brent bulls to launch a counterattack.

The decline in exports and falling prices clearly do not suit Russia, whose oil revenues are melting before our eyes. Saudi Arabia is not averse to reducing production, as it fears that by the end of the year it will drop significantly in Russia due to Western sanctions. And in such conditions, it is necessary to save production facilities in order to turn them on later. Moscow and Riyadh are the key figures of OPEC+, so rumors about the Alliance reducing production by 1 million bpd, which is equivalent to 1% of global supply, are likely to turn into facts.

The cartel and its allies are taking the fall of Brent as a challenge. They are clearly not thrilled by the prospect of North Sea grade falling to $80 per barrel. It is likely that OPEC+ would like to protect the $90 per barrel level. However, the Alliance is not fulfilling its plans anyway. In August, it received less than 3.6 million bpd. However, its intention to act aggressively is a bullish signal for the market.

Also, Russian oil exports are constantly declining. Maritime deliveries to the EU and Britain have fallen by 60% from levels that took place before the armed conflict in Ukraine. At the same time, the process of redirecting black gold from Europe to Asia begins to falter. Three key buyers: India, China, and Turkey imported 2.2 million bpd in June, but by the end of September, this figure fell by 350,000 bpd.

Dynamics of Russian oil flows

Supply problems are reflected in JP Morgan's forecasts, which sees Brent at $101 a barrel in the fourth quarter. The main arguments cited are a recovery in demand, insufficient investment in field development and other targets by energy companies, the absence of an agreement on supplies from Iran, and OPEC+ production cuts.

Alas, the main driver of the fall in oil prices is currently fears of a reduction in global demand against the backdrop of an approaching recession. It is likely to become a reality due to the aggressive tightening of monetary policy by central banks.

Technically, there is a steady bearish trend on the Brent daily chart. Nevertheless, the formation of the 1-2-3 pattern increases the risks of a pullback. We build up the longs formed from the level of 87.6 per barrel on the break of the fair value at 90.7. The target is the mark 93.9, located near the upper border of the downward trading channel.