If the Brent bears hope for an impending recession and the associated reduction in demand, then the bulls expect a decrease in production volumes. Who will be right? How will the oil price change? Let’s discuss the topic and make up a trading plan for Brent.
Weekly oil fundamental analysis
Saudi Arabia tried to explain that by reducing oil production, the country neither challenges the US nor takes the side of Russia in the armed conflict against Ukraine but only tries to balance the oil market. Washington threatened Riyadh with consequences for such a move, which caused Brent and gasoline prices to soar, resulting in huge problems for Democrats ahead of the midterm elections. Historically, the Saudis have ignored American criticism, so their desire to justify themselves indicates a sense of guilt.
Saudi officials claim that OPEC+ members have unanimously decided to cut production by 2 million b/d. The reason is the updated forecast for the increase in oil demand. It was lowered by 460 thousand b/d to 2.64 million b/d in 2022 and by 360 thousand b/d to 2.34 million b/d in 2023. Following the IMF, OPEC+ lowered its assessment of global demand from 3.1% to 2.7% this year and from 3.1% to 2.5% next year. High inflation, aggressive monetary restrictions, and geopolitics were named as the main reasons.
IMF forecasts for the global and major economies
Source: Financial Times.
OPEC+ believes that in 2022 GDP in US and Eurozone will be expanded by 0.8% and 0.3%, respectively. In previous forecasts, the figure was 1.7% for both regions.
The forecast decline explains the decision to cut production by 2 million b/d to stabilize the market. However, not everyone agrees with this. The US threatened consequences, while IEA officials said such moves by Saudi Arabia and OPEC+ pushed the global economy into recession. The IEA believes that production will be reduced not by 2 million b/d, but by 1 million b/d, which is close to the truth.
The euphoria of the Brent bulls due to the decline in oil production was short-lived. The market’s attention has turned to issues of global demand reduction, which was influenced by IMF forecasts and the intention of the Fed and other central banks to continue aggressively raising rates. Collective monetary restriction increases the global recession risks and contributes to the USD strengthening. This negatively affects oil futures, which are quoted in US currency.
Weekly Brent trading plan
Do not expect a recession in the US economy before May-June, which will also not be deep. However, the reduction in Russian oil production may attract all the attention of investors shortly, which makes Brent purchases following the breakout of resistance at $94 and $95.7 per barrel profitable. On the contrary, the lack of attention to Russia amid fears of a global recession is a reason for entering Brent sales when the price falls below $90.8.
Price chart of UKBRENT in real time mode
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