Oil is rising as spare capacity reduces and geopolitical tensions rise
Tomorrow's meeting by OPEC+ is likely to be market-moving only if they come out with a surprise decision. They are fully expected to announce a further 400K additional barrels per day as is the plan agreed on last summer. A delay, argument or maybe a let’s wait and see the decision, would be bullish for Oil as the market is still showing greater demand than supply and spare capacity is diminishing to fill any unforeseen disruptions. An increase in supply plus diminished demand would get the price of Brent lower, but it is unlikely this happens next month. Especially with the Russian military build-up at Ukraine’s flanks.
Commodity Analysis - Oil
OPEC+ is expected to ease supply curbs by 400K barrels per day (BPD) in March after maintaining a very disciplined path to full production. The meeting that concludes tomorrow comes amid increased geopolitical tensions at the Ukraine-Russia border, between China and the US, and within the Middle East, where the Houthis in Yemen, backed by Iran, continue to clash with their neighbours. Brent futures hit $90/bbl in recent days and has added to global inflation concerns, and the expectations of $100/bbl before a major decline, is growing.
The impact of a war on European soil would be devastating for the energy needs of the Europeans and the United Kingdom, though some analysts say it would harm Russia more economically than those who would be cut off. In response to this threat, the US said it is engaging LNG suppliers to handle storage and diversion to Europe if necessary. If Russian energy exports are banned, Saudi Arabia, Kuwait, and Iraq would not be able to provide the shortfall with crude because they have already committed their annual supplies.
OPEC+ members have downplayed recent price movements by saying they are due to an increase in geopolitical risk premium rather than a strengthening of demand fundamentals. Plus, why wouldn't an oil producer want sustained higher prices in their commodity? Additionally, the group is worried that some African OPEC nations underproduce, which drags down actual production; the most recent OPEC MOMR identified Nigeria and Angola as the main culprits.
With 9 million barrels a day cut by OPEC+ in Q2 2020, the oil market inventories tightened dramatically. The group plans to boost supply by 400K barrels a day until September 2022. West African countries like Angola and Nigeria have seen their production quotas fall far short of forecasts in recent months, partly due to disruptions in supply because of COVID-19, but also due to poor investment, causing accelerated declines. Although oil prices recovered dramatically, operators declined to increase investment due to unattractive fiscal terms, geopolitical risks, and corruption, among other factors. Production and drilling declined as a result and without new projects coming online there will be continued production shortages. Production continued to underperform throughout 2021, with the group falling 700k b/d behind their production targets in Q4 2021.
Due to these countries falling behind, market assessments of OPEC spare capacity have been revised. However, future revisions to other estimates may also be necessary as OPEC+ continues to raise quota targets.
All in all, the meeting on Wednesday is likely to go as planned, but any change to the expected additional 400K BPD will move the oil market and USDCAD in particular.
The ActivTrader platform shows that 64% of traders are expecting their shorts to win, so as a contrarian indicator we could be seeing higher prices until this cohort get stopped out or flip to being neutral or long.
Looking at the daily chart for Brent, there is a divergence in price to the stochastic indicator which could be signalling falling buying pressure as the higher swing highs and higher swing lows convert to lower daily closes. There is no bearish market structure confirmation until we get a test below the lows printed on the 24th of January 2022. Before that swing low test, there is a small zone of imbalance that could get filled around the $87.50 level and if prices did not reject from there maybe there would be a sweep lower.
On an intraday chart of Brent, the H1 200-period EMA has been acting like a decent dynamic support level and it also resides at the $87.50 level, so I am expecting a test of that zone. Depending on what happens after the OPEC+ meeting in terms of do they meet analysts’ expectations or not, will signify whether we look to buy a dip or wait for a market structure flip.