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Oil prices dropping like rock

Eventually, the stellar rally in the oil market has been disrupted by a few events. Major oil exports participating in the OPEC+ deal have unexpectedly reached a compromise. Besides, global appetite for risk has been dampened by the fast spread of the highly contagious Delta COVID-19 strain. These factors dealt a blow to both Brent and WTI prices, thus both benchmark grades have incurred the heaviest losses over the last 10 months. The oil market has entered the correction stage, having plunged 10% off the multi-year highs recorded in early July.

At the latest summit, de facto OPEC leader Saudi Arabia and the UAE fell out because of they couldn't agree on scaling back individual oil quotas from August. The talks on increasing oil production have failed a few times. So, the cartel members and their allies were not able to fix the date for the next summit, hence it was postponed indefinitely. Nevertheless, on Sunday, July 18, the main rivals managed to come to the common denominator. As a result, Saudi Arabia and Russia agreed to ramp up production rates from 11 million bpd to 11.5 million bpd. The UAE insisted on increasing its oil output from 3.2 million bpd to 3.5 million bpd. Importantly, Abu Dhabi pointed out that the UAE would always adjust its production rates for the cartel needs, thus dispelling fears about its withdrawal from the OPEC+ deal.

To sum up, the cartel and its allies reached the decision to scale up oil production by 400K barrels per day until the end of 2022. This outcome cleared up the cartel's stance, removed uncertainty about global supply of crude oil, and allowed investors to focus on energy demand. However, that's where they've encountered headwinds. The global oil demand is now dented by fears about the fast spread of the Delta coronavirus strain around the world, speculations that the global economic recovery has passed its peak, the prospects for a further slowdown as well as concerns about a step towards tighter monetary policy in the US. Such an array of factors pushed oil prices down. Besides, the nosedive of Brent and WTI prices escalated amid a slump of US stock indices which are viewed as barometers of the risk appetite.

Dynamics of Brent crude and Dow Jones


Meanwhile, the Delta COVID variant is raging in over 100 countries. Asia and Europe are the most vulnerable to the virus. In theory, this state of affairs should erode travel activity that will reduce demand for crude and petroleum products. All in all, global demand for oil could recover at a slower pace than currently expected by investors.

Fresh evidence that the oil market is turning less bullish than earlier in the year is that difference between prices of futures contracts with various expiration dates known as backwardation has decreased from 78 cents to 56 cents.

Nevertheless, despite headwinds, I still believe that new strains of COVID-19 are going to slow down the recovery of the global economy but they won't push the global GDP back to contraction. Perhaps Brent and WTI have surged to extremely elevated levels on the back of the euphoria among energy investors for the most part of 2021. However, the overall trend of both benchmark grades remains bullish. This allows traders to open more short positions during retracements.

Technically, the daily Brent chart has formed the pattern called Splash and reversal with acceleration. A breakout of the trendline at the Splash stage indicates that the bears are serious to regain control. However, they haven't let oil prices sink below the trendline yet. So, the bulls are still holding the upper hand in the market. In this context, bounces off support lines at $66.3 and $63.2 per barrel should be used to plan long positions.

Brent, daily chart


The material has been provided by InstaForex Company -