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Oil starts to depreciate amid weakening geopolitical tensions

What seemed like a pipe dream at the beginning of 2021 is now perceived almost as a fait accompli. Alas, Brent, which has traveled a long way up, may never take the last step. The blame for this, most likely, will be Russia, which is gradually withdrawing troops from the border with Ukraine. The exercises are ending, and everything that you have come up with in the West about the invasion is nothing more than a figment of the imagination.

Despite the fact that the oil market is fundamentally strong due to the ongoing growth of global demand and limited supply, geopolitics has become the main driver of the Brent rally over the past few weeks. Russia is one of the top three oil-producing countries, and the imposition of Western sanctions on the country's energy sector could exacerbate supply problems and easily push North Sea prices up to $100, $125, and even $150 a barrel. In the latter case, according to JP Morgan estimates, global inflation would jump to 7%, which would force central banks to actively raise rates and lead to a new recession in the global economy.

Against such a background, one should not be surprised at the rise of Brent to 8-year peaks. For the first time since 2018, the difference between the nearest North Sea futures contracts exceeded $2 per barrel, backwardation in the oil market has not been so strong for a long time, and the demand for call options is going through the roof. They haven't been that expensive compared to puts since 2019, according to Bloomberg estimates.

Spread dynamics between Brent futures contracts


The question is, can oil reach $100 a barrel without geopolitics? At first glance, not everything is so simple. Iran is reporting to Russia significant progress in negotiations with the West on its nuclear program, which is fraught with an increase in exports from this Middle Eastern country. American manufacturers, looking at high prices, ask themselves: if not now, then when? And the Energy Information Administration reports production in the Permian Basin has risen to record levels, the latest of which exceeded 5 million b/d, for the third month in a row. The global economy is slowing down amid the depletion of fiscal and monetary stimulus.

At the same time, global demand, according to revised IEA estimates, reached pre-pandemic levels already at the end of 2021 and will continue to grow. It will take about 4 months to introduce a new rig in the US, compared to 4-6 weeks previously. In addition, the owners of oil companies continue to fulfill promises to shareholders that the capital will go to dividends, and not to new developments.

Dynamics of global oil demand


Against this background, it is extremely naive to talk about breaking the upward trend for Brent. It is best to expect that the reduction in geopolitical tensions in Eastern Europe will result in a correction, and buy oil on the decline.

Technically, the Wolfe Waves pattern retains its relevance on the weekly chart of the North Sea variety. Its target is located near $108 per barrel. We continue to follow the "buy" recommendation, voiced at the beginning of the year.

Brent, Weekly chart


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