Home Market Oil starts and wins. Forecast as of 01.06.2022

Oil starts and wins. Forecast as of 01.06.2022

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The oil bulls are supported by both supply and demand, so their opponents are losing. How long will the oil buyers control the market? Let the topic and make up a Brent trading plan.

Monthly oil fundamental analysis

The oil bulls are going ahead. EU debates on the sixth package of sanctions against Russia and lockdowns in China kept the Brent price in the trading range of $101-113.5. Once the EU leaders came to an agreement and China started lifting lockdowns, the oil price set off for a rally, hitting the highest level since the beginning of spring.

According to Standard Chartered, lockdowns in China due to COVID-19 pressed down oil demand by 1.2 million barrels per day. Lifting of the lockdowns will bring the demand back to 16 million barrels per day, bringing the global indicator to 100 barrels per day. Furthermore, the high demand for oil products will boost oil consumption even more.

Although Brent is still far from its all-time high of $147.5, petrol prices are much higher. The closure of 2.8mn barrels per day of refinery capacity in the last two years on the grounds that it was surplus to requirements during the coronavirus pandemic — and for environmental reasons — has left the oil processing sector struggling to meet demand during the current maintenance season. Compounding the situation, China has restricted fuel exports at a time of record low inventories in certain parts of the world.

Dynamics of oil products prices

    

Source: Financial Times.

Therefore, the Brent buyers are supported by the recovery of China’s economy and increased demand for refined oil products. Before the war in Ukraine, according to Energy Aspects, the share of the Russian oil in the EU oil imports was 29%, or 2.5 million b/d. About 800,000 b/d went via the Druzhba pipeline. The company predicts that by the end of 2022, Russian imports will be reduced to 500 tons per day, which will be 20% of the pre-war level. The IEA believes that it will be difficult for Russia to sell oil to Asia. The duration of deliveries to China is about 60 days, which is significantly longer than to the euro area. In addition, the UK and EU have agreed on a coordinated ban on insuring ships carrying Russian oil, forcing the owners of tankers to refuse Russian cargo.

The EU sanctions will be introduced in stages, for oil — within six months, for oil products — within eight months. The displacement of Russia from the oil market continues, which reduces supply and supports the Brent uptrend. Due to the expected decline in production in this country by 8% in 2022, OPEC + is considering suspending Russia’s participation in the deal of production increase by 430,000 b/d. Market sentiment is clearly bullish, as evidenced by the widening spread between futures with nearby delivery dates from $2.2 in early April to more than $4 per barrel.

Monthly Brent trading plan

I suppose the oil demand will be growing as China is lifting lockdowns and the EU continues introducing sanctions against Russia. Therefore, Brent should continue to rally towards $124 and $131. I recommend holding up longs entered at $105 and $113.5 and adding up to them on corrections.

Price chart of UKBRENT in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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