Oil has rallied over the past two days to $71.2/bbl Brent, but clouds are gathering above, which under adverse circumstances could turn into a storm that could wash away much of the gains of the recent rally.
Brent gained support earlier in the week, falling below 68 for the second time in the past three weeks. Bulls got help from continued strength in equity indices and the passage of the infrastructure package, which promises to boost energy demand.
Perhaps this is almost the end of the positive news on oil.
The Biden administration has repeated several times in the last 24 hours its call for OPEC+ to increase production to limit the rise in oil prices. The market quickly digested the news, returning to current levels after briefly dipping below $69. However, as is often the case, politicians’ actions are often inert: slow to pick up speed and slow to stop.
US oil production rebounded last week to 11.3M BPD. Production growth has resumed after a slight pullback in recent weeks.
Biden’s calls for OPEC+ to ramp up production will help remove a psychological barrier from the industry in the US, which seemed embarrassed to raise output amid the popularity of alternative energy.
OPEC+ itself has also clearly warmed to the idea of using recovery in demand to boost supply in recent months, content with current price levels. The cartel intends to add 400K BPD to its agreed quotas every month. But overall production rises more strongly as several participants are free to increase their output. On top of this, Saudi Arabia brings back barrels under-supplied to the market as part of the voluntary production cuts earlier this year.
Added to this is the spreading of coronavirus in Asian countries, the primary source of oil consumption growth. This region, especially China and Japan, is adopting far more severe travel restrictions than Europe and the US. The authorities want to suppress the spread as much as possible before the autumn season when conditions will be even more favourable for viruses.
Oil is also threatened by the imminent start of the tapering of Fed balance sheet purchases, which could end the current phase in the markets by triggering an impressive correction.
On the technical analysis side, Brent crude received support at 76.5% Fibonacci retracement line of the November-July rally. A break below the $68 level could see the bulls capitulate and quickly take the price towards $62, where the 200-day moving average and the 61.8% retracement level of the multi-month rally are concentrated.
If the Fed doesn’t rush to taper, surprising us, the markets could turn on their greed to the full, taking the oil price above $80 before the end of the year.
