Investment Idea

Could Oil find a bottom with Russia, China, and OPEC+?

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08/12/2022 | 2 min read

Since its peak in March at roughly $120 a barrel, brent-prices have been falling to USD $80 as sanctions against Russia and lockdowns in China have caused demand disruptions.

During the weekend, the G7, EU and Australia agreed on putting a price cap on Russian oil at USD $60 per barrel to limit price surges driven by extraordinary market conditions and drastically reduce the revenues Russia earns from exporting oil to the west. As a response, Russian spokesman Dmitry Peskov called the sanction unacceptable and warns to call of all business with any country applying the price cap.

China has accelerated the loosening of restrictions this weekend, as public unrest has been ramping up amid the weakening economy in the country. As several Chinese cities, including Beijing and Shanghai have eased restrictions, expectations are building up that Beijing could ditch the strict pandemic policy entirely. However, as of now, China´s top leadership committee, has not made any formal announcement on its stance towards any further loosening nationwide.

Also, OPEC+ held a meeting during the weekend regarding the 2 million-barrels-per-day reduction of production that was announced in October. Despite continued price falls since October, the producers in the alliance left the meeting with unchanged production targets, presumably on the notion that a Russian response and a reopening in China might give some recovery in prices on brent.

So, what could bring Brent oil back? First off, a Russian response to defy the price cap by cutting supplies to the market of the west would bring prices back up. As of now Russia has not made any formal action plan. Secondly, further reopening in China would bring support to brent oil demand as economic activity in the country pics up. Thirdly, more reactive supply cuts from OPEC+ following up on the developments on the Russian embargos and Chinas restrictions would offer additional support to brent crude oil prices.

Brent Crude Future, Current Rolling (In USD) daily 12-month chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Brent Crude Future, Current Rolling (In USD) Weekly five-year chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence


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