BRENT CRUDE OIL (LCOc1) ANALYSIS
- Backwardation points to elevated prices.
- Recession woes may be declining.
- OPEC+ output levels.
BRENT CRUDE OIL FUNDAMENTAL BACKDROP
Brent crude oil conditions remain tight despite the recent price slump. If we look at the time spreads, we can see that the market remains in backwardation indicating excessive demand relative to the current supply thus adding to the upside narrative. The reason for the drop in brent prices is due to a hawkish Fed as well as growing fears around a global recession which has hurt risk assets such as crude oil. The elevated U.S. dollar has not helped the situation but fundamental tailwinds still outweigh current headwinds for oil prices.
With regard to the OPEC+ meeting next week, the spotlight will be on output levels particularly post-August which has yet to be revealed or even proposed by member nations. The agreement to supply at specified levels will only last until December 2022 thereafter, member nations may produce at will unless an additional accord is struck.
With regard to supply, an interesting trend is that actual OPEC+ (inclusive of Russia) output has fallen significantly below projected output figures which further reiterates the tight conditions within the oil market. This is primarily due to sanctions on Russian oil which is included in the forecasted supply figures. I don’t see a change in this any time soon which leads me to believe oil prices will remain supported in the medium/long-term.
BRENT CRUDE (LCOc1) DAILY CHART
Chart prepared by Warren Venketas, IG
The daily brent crude chart above shows price action testing the key area of confluence around the medium-term trendline support (black). Bears have been unable to push below this level for the 6th time in 2022, further highlighting the importance of this support zone.
After considering the fundamental backing, I am looking for some bullish upside in the coming months. What would invalidate this bullish trajectory would be a break below trendline support and the Wednesday swing low at $104.92.
The Relative Strength Index (RSI) is also approaching oversold levels which may be an indicator that the downside move is fading.
Key resistance levels:
Key support levels:
- Trendline support/$104.92
IG CLIENT SENTIMENT: MIXED
IGCS shows retail traders are marginally NET LONG onCrude Oil, with 56% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, after recent changes in positioning we settle on a short-term cautious bias.
Contact and follow Warren on Twitter: @WVenketas