Oil is focused more on the future than the present. The commitment of Chinese authorities to support the troubled real estate sector, boost domestic demand, and address local authorities' debt issues, along with the anticipated conclusion of the monetary restriction cycles by the Fed and other central banks, has enabled Brent to experience a four-week rally, followed by a three-day winning streak. As a result, the North Sea grade has surged to its highest level since April.
Saudi Arabia and Russia laid the foundation for this upward movement, which reduced their production and exports. Although the market initially overlooked the positive news, the reality must be addressed. The supply shortage has led to an expansion of backwardation to $0.36, the highest level since November. Such a spread between futures contracts with different expiration dates indicates that the market is controlled by "bulls."
Buyers need to be more satisfied by strong statistics on Chinese GDP for the second quarter or the slowdown in business activity in the Eurozone, which has fallen below the critical level of 50 for the second consecutive month. The markets have faith in the promises of official Beijing, despite no specific stimuli being announced at the Communist Party Congress.
Chinese economic dynamics
The weakness of China cannot persist indefinitely. Optimists genuinely hope that the second half of the year will bring better GDP performance, with China contributing to 2/3 of the global oil demand growth.
Brent supporters are placing their bets on the end of the monetary restriction cycles by the Fed and the ECB, which will facilitate a soft landing for the US economy and save the Eurozone from recession. Consequently, even negative news from European PMIs is seen as favorable for risky assets and black gold. The weaker the business activity, the higher the likelihood that the deposit rate increase to 3.75% in July will mark the end of the tightening monetary policy cycle.
European inflation dynamics
The acknowledgment is that the ECB was late in implementing its monetary restrictions. When the Bank of England began raising the repo rate in December 2021, inflation in the currency bloc reached 5%. However, Christine Lagarde and her colleagues stubbornly believed high prices were temporary. As the deposit rate started to rise, the CPI in the currency bloc soared to 8.9%. It is now time to close this, and risky assets and commodities find encouragement in this development.
Hence, it cannot be asserted that oil's reaction is solely based on macroeconomics. Its rally is founded on the reduction of production and exports by Saudi Arabia and Russia. The upward movement persists due to rumors of official Beijing supporting the Chinese economy.
From a technical standpoint, Brent has determined the direction for further movement after implementing the Expanding Wedge pattern. This has enabled us to establish long positions with targets at $82 and $86 per barrel. The first target has already been achieved. The recommendation is to buy.
