18.07.202310:31 Forex Analysis & Reviews: New game rules in oil market

The bet on a tighter oil market and a related price rally was unprofitable in the first half of the year. Companies that anticipated Brent crude reaching $100 per barrel were wrong. Bulls were forced to constantly moderate their appetite. However, in July, the situation began to change. Even a decline in the benchmark North Sea grade amid disappointing data from China and restarted operations at the Libyan field are unlikely to dampen the bullish mood.

China's economy expanded by 6.3% in the second quarter from a year ago, missing analysts' 7.3% consensus forecast. In quarterly terms, the economy grew 0.8% compared to the first three months of the year. Weak business investment, households' fears preventing them from spending their savings, and insufficient external demand for industrial goods act as obstacles to economic growth. As a result, JP Morgan, Morgan Stanley, and Citigroup trimmed their 2023 gross domestic product forecasts for China to 5%. This suggests weaker oil demand and resumed pressure on prices.

China's GDP dynamics

In reality, China's oil consumption increased by 14% from April to June, which is a factor contributing to higher oil prices. According to Bloomberg insiders, Russia intends to cut oil exports from its western ports by 200,000-300,000 barrels per day. Saudi Arabia is already implementing its pledge to cut production by 1 million barrels per day. In this case, Saudi Arabia will lose its status as the largest OPEC+ oil producer to Russia, the IEA estimates.

According to the US Energy Information Administration, US shale oil output is set to fall in August for the first time this year to 9.4 million barrels per day. American producing companies' policy of refocusing from investing in exploration and field development to shareholder dividend payments is starting to bear fruit. If production cuts become a trend, Brent crude bulls will have a new trump card. In the meantime, they are taking advantage of a weaker dollar.

Oil and US dollar dynamics

In fact, a 180-degree turn in the market is driven not by production cuts by the US, Saudi Arabia, and OPEC+ as a whole but by macroeconomic indicators. Throughout the first half of 2023, investors were confident that the Federal Reserve's aggressive monetary policy tightening would push the US economy into a recession. Accordingly, they expected the global economy to slow down and global oil demand to decrease. However, a significant decline in US inflation to 3% has dramatically changed the situation.

Now markets are betting that the US Federal Reserve will end its interest-rate hiking cycle and ensure a soft landing for the US economy. When combined with China's faster GDP growth than in January-June, as well as a recovery in the European economy, there is a likelihood of the oil market switching into a deficit. Moreover, according to Standard Chartered analysts, the global oil market is already in a deficit. They estimate that the shortfall will more than double in coming months, draining oil inventories by a hefty 2.8 million barrels a day in August.

From a technical point of view, a pullback of Brent crude followed by a return above the pivot point of $78.65 per barrel will make it possible to add long positions, counting on a rise to the target levels of $82 and $86.