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Oil's retreat after an impressive rally driven by OPEC+'s unexpected decision to ramp up production cut commitments is hardly a fall. Most likely, we are talking about the closing of positions by individual speculators against the backdrop of positive news for oil. When everyone else is buying, there is a great opportunity for asset managers to sell.
In the week to April 4, they were building up long positions in Brent at the fastest pace since 2019, while shorts were shrinking at a rate not seen since 2020. As a result, net longs jumped by 73,000 contracts. The only time there was a bigger influx was in 2016. At that time, too, it was about the unexpected OPEC production cuts, which eventually led to the creation of OPEC+.
Dynamics of speculative positions on Brent
According to the Macquarie Group, long positions in the North Sea variety will continue to increase against the backdrop of a reduction in global stocks.
Indeed, many fundamental factors indicate that the potential of the upward movement is far from being exhausted. In March, fuel demand in India, the world's third largest oil consumer, jumped 5% to a record 4.83 million bpd. The slowdown in inflation in China to the lowest level since September 2021 allows us to hope for additional fiscal and monetary stimulus from Beijing. Finally, the weakening of the U.S. dollar due to the imminent end of the Fed's monetary policy tightening cycle is also creating a tailwind for oil.
It's not just about the Fed. According to Bloomberg research, in 2024, 20 of the 23 largest central banks in the world will reduce the cost of borrowing. As a result, their average rate will drop from 6% to 4.9% by the end of next year. This wide-ranging monetary expansion is good for oil demand and pushes prices up.
Moreover, the cessation of supplies of almost 500,000 bpd from semi-autonomous Kurdistan region continues for the third week. Russia said that its production in March decreased not by 500,000 but by 700,000 bpd, and offshore oil flows from this country amid Western sanctions for the first time in 8 weeks fell below 3 million bpd.
Against this background, it is not surprising that the bullish spread between the December 2023 and 2024 Brent futures contracts rose from $2.53 three weeks ago to $5.45 per barrel.
Dynamics of Brent and spread on futures contracts
Thus, the market situation remains bullish, and the current price decline is nothing more than a correction after an impressive rally. The recovery of the upward trend is a matter of time.
Technically, on the daily chart of Brent, thanks to the well-executed 1-2-3 pattern, there was a change in trend. The bears' attempts to close the gap formed a week earlier look clumsy. The rebound from the supports at $83.2 and $82, and the breakout of the resistance at $85.4 per barrel, should be used to buy in the direction of the previously announced targets at $90 and $95.
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