In theory, falling prices to multi-year lows should stimulate demand and increase the value of the asset, but if consumers are sitting at home because of the coronavirus and can not afford to increase consumption, then you can not dream of an increase in prices. The collapse of Brent and WTI to the 18-year bottom on the background of a huge reduction in global demand and the oil war between Saudi Arabia and Russia does not guarantee a quick rebound up. However, in the near future, the “bulls” may have new trump cards.
The Texas variety marked the worst month and quarter in the history of accounting, and the collapse in prices to the lowest level since 2002 was facilitated by the statement of Donald Trump on the extension of strict measures of social isolation until the end of April. Because of the coronavirus, global demand has declined by about a quarter. The loss of 25 million b/d is equivalent to current OPEC oil production or the combined consumption of black gold by the United States and Canada. At the same time, the oil war between Saudi Arabia and Russia contributes to the fall in prices. Riyadh intends to increase production by 2.5 million b/d and export to 10.6 million b/d.
Many black gold producing countries cannot afford such low prices and are forced to cut budget expenditures even at the expense of the fight against coronavirus. The projected global market surplus of 25 million b/d and WTI at $20 per barrel increases the risks of the bankruptcy of small and medium-sized companies in the United States. Large companies are forced to reduce investment in exploration and production, which will contribute to a gradual decline in American black gold production. It is not for nothing that Donald Trump is trying to establish contacts with Saudi Arabia and Russia. Washington’s recent statement on the dialogue between the White House and the Kremlin on the stabilization of the situation in the oil market was one of the drivers of Brent and WTI growth at the auction on March 31.
The second good news for the “bulls” came from China, where business activity in the manufacturing sector rose above the mark of 50, indicating recovery, and the people’s bank once again eased monetary policy. Standing on the threshold of victory over the coronavirus, the Middle Kingdom can seriously change the rules of the game. It is the largest consumer of black gold in the world, and the recovery of the local economy will contribute to the growth of Brent and WTI.
Dynamics of business activity in China
Let’s not forget that the global surplus of 25 million b/d reveals another problem – the lack of storage capacity. Markit expects that due to lack of demand and infrastructure difficulties, global production will decrease by 10 million b/d.
Thus, a possible truce between Russia and Saudi Arabia with the assistance of the United States, an increase in oil consumption in China and a reduction in global production due to infrastructure problems create the ground for a rebound in Brent quotes, which is confirmed by the technical picture. The quotes are in close proximity to the 113% target for the “Bat” pattern, which increases the risks of a pullback to 23.6%, 38.2% and 50% of the last downward wave. The reason for opening long positions may be a break in the resistance at $28 and $31.7 per barrel.
Brent, the daily chart