FX.co ★ Oil market takes a breather

After starting off on a positive note in the early fall, oil has slowed down its pace of growth in mid-September amid fears over the QE tapering and the fall of the Chinese real estate giant Evergrande. China is a top oil importer. If its economy starts to collapse, a wave of sell-off will sweep through the entire commodities market. At the same time, expectations about the tightening of the Fed's monetary policy give strength to the US dollar but negatively affect oil prices.

China accounts for over 40-70% of the world's total fuel consumption. Its real estate sector makes up a quarter of GDP, so its shutdown may cause a 5-20% reduction in demand for commodities. These numbers are quite impressive. Therefore, the Evergrande issue looks like a global problem. Will Beijing support the company? Or will it give an opportunity to the world stock indices led by the American ones to continue the correction? We will get the answer in just a couple of days.

And now let's pay attention to other drivers that influence Brent and WTI futures. In particular, we are talking about supply. Three weeks after hurricane Ida has left the Gulf of Mexico, about 18% of the region's oil production is still shut down. Royal Dutch Shell, the largest US oil producer in the Gulf, has announced that it intends to cut production in early 2022. Conversely, the supply is growing across the Atlantic. In particular, the Reuters insider reports that OPEC + has fulfilled its obligations to increase production by 116% in August. In July, it was 109%. According to the draft budget submitted by the Ministry of Finance to the government, Russia expects its oil output to return to a post-Soviet high in 2022. It will rise by 8% year-on-year to 559.9 million tons in 2022 and will stay close to this level in 2023.

Oil production in Russia

The OPEC + members say they are not going to change their plans. The UAE sees no reason why the alliance should quit its plan of raising production. What is more, Iraq believes that the process of output increase by 400,000 b/d will continue in November if prices remain at the current levels. According to Baghdad, the commodities market will hit the balance in the first quarter of 2022, with Brent projected to trade at around $70 per barrel.

The FOMC meeting may also move the oil market. The announcement of the Fed about the tapering of the asset purchase program or the shift in the consensus expectations for the first rate hike from 2023 to 2022 will definitely strengthen the US dollar. Since oil is quoted in this currency, a rise in the US dollar will put downward pressure on Brent and WTI. On the contrary, if the Fed stays uncertain about its further monetary policy, the sell-off of the US dollar index will lend a helping hand to oil.

From the technical viewpoint, a retest of $73.25 p/b is quite possible on the daily chart. The price may even test the line of 2 to 4 of the Wolfe Wave pattern near $72.1 which currently serves as dynamic support. A rebound followed by a close above these levels will be a good sign to open long positions with the targets at $79.5 and $81.2. The same is true if there is a breakout of the resistance level at $75.7.

Brent daily chart