Expectations of strong US employment statistics for May and the OPEC+ meeting contribute to the closure of long positions in oil, which leads to a correction and deterioration of market conditions. Despite the preservation of backwardation, the spreads between futures contracts are beginning to shrink, which is the first sign of the weakness of Brent and WTI bulls. It is not surprising that there is weakness amid the strengthening of the US dollar and rumors about an increase in the volume of black gold production from Saudi Arabia, Russia, and their allies.
Dynamics of the oil market
Taking into account the fact that OPEC predicts that in the fourth quarter the oil deficit will be 2.2 million b/d, the alliance may well increase production by 0.5-1.0 million b/d, beginning August. This opinion is shared by RBC Capital Markets, but rumors are growing in the market that the cartel and its allies, looking at the fall in black gold prices and the spread of the COVID-19 delta variant across the planet, should be more cautious. In my opinion, 1 million b/d is the best option that will suit all parties, including the Joe Biden administration.
Oil market deficit
OPEC+ must be wise and take many factors into account. Yes, negotiations between the United States and Iran on the lifting of sanctions and a nuclear deal are proceeding soundly, but the situation may change at any moment, which is fraught with the supply of additional barrels to the market, which the alliance did not take into account. Yes, low investment in production, significantly fewer rigs than it was before the pandemic, mean that black gold production in the United States is currently 15% below the record peak of 13 million b/d that took place before the recession. Nevertheless, everything can turn upside down in the United States.
It is interesting that the market reaction to a larger volume of additional barrels from OPEC+ risks being unpredictable. This has already happened: the alliance decided to increase production by a larger amount than predicted, but investors considered this information as a signal of the authoritative organization's optimism about the recovery of global demand and began to buy Brent and WTI with renewed vigor. As a result, the cost of the North Sea variety increased by 45% since the beginning of the year.
The strengthening US dollar also creates pressure on black gold. The Fed may start raising the federal funds rate as early as 2022. This, along with a consistently high inflation rate, requires the American economy to reach full employment. Judging by the Federal Reserve Bank of Dallas research, this could happen as early as the first half of next year. Moreover, the drawback of factors limiting labor supply could have a positive effect on employment outside the US agricultural sector as early as June.
Technically, despite the pullback, there is no reason to doubt the strength of Brent's upward trend. Most likely, the 224% target according to the AB=CD pattern will be fulfilled, so the rebound from dynamic supports in the form of moving averages near $73.6, $72.5, and $71.5 per barrel should be used to form long positions in the North Sea oil.
Brent, Daily chart
