Oil market showed encouraging growth at the beginning of the week with Brent quotes recovering to $60 a barrel. Such price movement was highly predictable taking that the entire energy sector has been substantially oversold lately. Plus, a number of technical indicators are literally screaming about the inevitability of a pullback. Besides, over the past month, market participants have been actively selling oil on the back of increasingly urgent overproduction problem.
When it came to light that Saudi Arabia, Russia and the United States, the three world’s leading oil producers have increased their production by more than 1.5 million barrels in the period from May to November, the oil could go only one way - down. The absence of an alternative scenario is also explained by the fact that current supply does not correlate in any way with the world consumption, especially amid escalating trade tensions between the US and China, that threaten the recovery momentum of the world economy. In other words, we are in a situation where supply grows at a much greater pace than demand. All this had led to a protracted slump in oil prices.
The market is currently developing an obvious long-term downtrend. Investment funds don’t have faith in oil growth either. According to JBC Energy, hedge funds are getting rid of their long positions - net long positions in Brent have already dropped to their lowest levels since the end of 2015. We also share the expectations of long-term weakness in the oil industry. However, before market participants resume sales, buyers have a chance to exit at higher prices. At the moment there’s a high probability of the bullish attempt to recapture the initiative as the market’s attention is gradually shifting from the assessment of market supply to the upcoming OPEC meeting, and to disagreements between the United States and China.
Of course, constructive negotiations in both cases can improve market sentiment and support the demand for risky assets, which traditionally include oil. The OPEC meeting will be held as soon as next week on December 6. The Middle East cartel may decide to adjust the aggregate supply of oil in order to balance out the entire market and prevent an even greater collapse in prices. Also, investors looking forward to the G20 summit on Friday and Saturday, which will be devoted to the trade dispute between China and the United States. Considering all of the above said, short-term growth with Brent recovery to $65 per barrel is the main scenario for now. If you buy from current levels, the profit potential may exceed 7%, which is a decent result, given that it may take only a week to achieve it.