One step forward, two steps back. After a short rise, oil again fell below the levels of the beginning of the armed conflict in Ukraine, and the short-term bullish spread on Brent futures contacts collapsed from $2.08 in early August to $0.67. And how could it be otherwise if, in the context of a declining global economy, investors are faced not only with a slowdown in global demand growth but also with the prospect of an increase in supply.
Only one of the three key organizations in the oil market, the International Energy Agency, raised its forecasts for oil demand growth in 2022–2023. The other two, OPEC and the US Energy Information Administration, on the contrary, have lowered them. However, one should not be too optimistic about the IEA estimates. In fact, the forecasts were brought into line with the opinions of other authoritative organizations.
Trends in Global Oil Demand Forecasts
Disappointing statistics from China and the US, and the risk of deepening the energy crisis in Europe as winter approaches, suggest that OPEC and the EIA are right: the picture of global demand does not look as rosy as before. China's industrial production in July increased by 3.8%, and retail sales by 2.9%, falling short of Bloomberg experts' forecasts of 4.6% and 5%, respectively. Manufacturing activity in New York State was the second-worst since 2001, and homebuilder sentiment was the longest decline since 2007.
The potential increase in production also contributes to the reduction of the spread on nearby Brent futures. In the US, it will grow to 9.049 million bpd by September, according to EIA estimates, which is the highest since March. In the Permian Basin, it will reach a record 5.408 million bpd. At the same time, Libya is increasing production, and the proximity of the West's nuclear deal with Iran only adds fuel to the fire of a potential increase in supply and contributes to a decrease in quotes for the North Sea variety.
Dynamics of the short-term spread on Brent futures
Perhaps the market is overestimating the factor of increasing exports from Iran. Obviously, it will take time for Tehran to build it up, and the quick effect will not be as "bearish" as it is currently expected. In addition, the country's response to the final proposal of the West is not advertised. It is likely that it will not suit Europe and the US, which will lead to a short-term increase in prices. The Iranian factor can be viewed as a kind of pendulum for the oil market: it is not known in which direction it will eventually swing.
Technically, on the daily chart, the fall of Brent below the local low of $92.9 will increase the risks of continuing the peak towards the convergence zone of $89–91 per barrel. If it fails, the fall to $84–85 will continue. These marks are located in the reversal zone of the Wolfe Wave pattern. Recommendation—short-term sales with a subsequent transition to medium-term longs on the rebound from key supports.
