Which risks is oil facing in the coming months?
The energy sector is experiencing the most severe changes since negative oil prices resulted from restrictions and lockdowns associated with the coronavirus outbreak. In 2020, the oil market plummeted to all-time lows but quickly recovered later. In light of the current circumstances, the situation is totally different now, and we shouldn't expect the oil market to return back to normal in the coming quarters. In this article, we will take a look at the energy market from different angles and analyze the main points.
Reasons for sharp rise and pullback
The oil market has been stormy in the past few months. This is due to the Russia-Ukraine military conflict. The oil benchmark soared after the E.U. announced it would ban Russian oil imports. Concerns that the oil market is heading for the biggest supply crisis in decades sent Brent quotes to the $130 mark. However, the price didn't stay in this area. Instead, it fell sharply and never came back to those highs. Let's consider the factors that prevent oil from rising again.
So, the oil benchmark retreated as the European officials stalled and couldn't seal the deal on banning Russian oil imports. Eventually, they decided not to ban the E.U. tankers from carrying Russian crude.
Most likely, the E.U. will impose a partial embargo at first. But gradually, step by step, they will phase out the import of Russian crude oil to the European energy market, which is highly attractive for competition, so there will be a tough fight. When we talk "market redistribution", all means will be used - both compensation and threats.
The corrective mood in the market was also supported by the Fed's monetary policy tightening, which caused the U.S. dollar to rise. As you know, there is a strong negative correlation between crude oil prices and the U.S. dollar. So when the U.S. currency strengthens, oil quotes face pressure.
The U.S. Federal Reserve is forced to tighten its monetary policy to curb inflation, which has long exceeded its target levels. In mid-May 2022, the long-awaited U.S. inflation report was released. According to the data, the consumer price index indicated that inflation had not peaked yet. And although consumer prices posted a decline, it turned out to be insignificant. This means that an aggressive rate hike cycle is still on the table. Fed Chairman Jerome Powell said the central bank is committed to raising rates "expeditiously" by a half percentage point at each meeting over the next few months. This hasn't happened in over 20 years.
China's COVID crisis is another negative factor pressuring the oil market. As strict lockdowns send major cities into hibernation, the Chinese economy significantly slows down. In the first months of 2022, imports of raw materials to China decreased by 4.8% compared to the same period in 2021. Saudi Arabia is particularly concerned about this situation. Saudi Arabian Oil Co., the nation's oil company, lowered the price of its Arab Light crude benchmark in Asia by $4.95, taking its price for June to a $4.40 premium above the average of the Oman and Dubai benchmarks. It won't help them much since Beijing prefers to fill its reserves with cheaper Russian crude it buys at a considerable discount.
Oil gains were also capped by the growth of U.S. crude oil inventories, which no one had foreseen. The API data showed U.S. crude inventories increased by 1.6 million barrels for the week ended May 5. In addition, the White House keeps pushing for green energy, complicating the already difficult energy situation across the globe. By doing so, the White House is forcing Russia and OPEC into one boat, where they jointly establish control over the oil market.
Oil outlook: What to expect?
All eyes are now on the Russia-Ukraine war. It all depends on how the military operation progresses and what measures the West takes to stop the conflict. A lot depends on Hungary's decision. If the E.U. ministers manage to persuade Hungary to sign up for the Russian oil embargo, oil quotes will receive additional support. However, there are a few "buts" about it.
First, the chances are that the United States will reach an agreement with Iran. The Iran nuclear deal is 90% agreed upon, according to media reports. Once it's finalized, we will see the return of Iranian oil to the global market.
Also, we should keep in mind the resumed negotiations between the United States and Venezuela to bring Venezuelan crude oil back onto the open international market.
How to trade oil?
Those who trade in oil need to make sure they get constant updates on recent events. The situation can change at any time, and it is important to track every opportunity to enter the market at the right time. You can use the AMarkets trading app that has an economic calendar and offers market analysis and trading tips. You can also open trades on the go and manage your account in the app.
Traders need to monitor new developments and sanctions against Moscow. The oil embargo issue is crucial now. But don't get your hopes up, expecting a new rally. Even if the E.U. leaders agree to ban most Russian oil imports, it will most likely be done in several stages not to rock the boat. In this scenario, the rise in oil prices will be negligible.
Brent crude oil price chart shows a triple top formed at the $114.75 level. It is unlikely that this level will be breached any time soon. The support level is located at $103.50 per barrel. In this regard, we can assume that Brent prices will fluctuate in the range of $100-$120.
Given the support at $100.00 and the resistance at $111.50 on the WTI chart, we recommend medium-term trading in the $95 - $115 range.
That being said, the best strategy would be to buy oil on downward corrections.
