Market Overview

Oil to correct to $55 by end of year

Brent crude fell to $66, at one point yesterday falling below $65, the area of the May lows, bringing the decline since the start of August to $10 or 13%.

This week oil prices have fallen below last month’s local bottom, forming a sequence of declining highs and lows.

On more than one occasion in the history of crude oil, the price dynamics in the first and second half of the year have contrasted sharply: the strong rally of the first months of the year gave way to a persistent sell-off since July-September. This was the case in 2005-2008, in 2014-2015, and 2018. The same pattern seems to be repeating in 2021.

From a macroeconomic perspective, the situation is now like 2014, as in both cases, the Fed was on the verge of tapering. However, the critical difference is that back then, oil was already sideways for several years, against the rapid growth in our case.

At the same time, it is hardly worth betting on a long-term bear market for oil as the economy and, thus, consumption continues to expand. The chronic shortage of oil in recent months, together with ultra-soft monetary policy in developed markets, has pushed the price of oil up and now is the time to take away some overheating. But no more than that.

We are now seeing the start of the Dollar’s strength on expectations of an imminent Fed’s tapering. Policy changes often trigger this kind of market cooling, although one should bear in mind that fewer stimulus is not an economic crisis. Hence, volatility promises to remain limited and short-lived.

From a tech analysis perspective, the corrections nearest target is at $63 per barrel Brent. The 200-day MA and the 76.4% Fibonacci retracement from April 2020-July 2021 are near this price.

But probably the bears will stop there. A return to $55 before the end of the year is more likely. That is at the same time 61.8% of the recovery rally, the price level at the beginning of this year, and the centre of the most important pivot range of the last seven years ($53-57).

If such an adjustment in oil prices does not entail a new tightening of production quotas, it will contain inflationary pressures and allow the global economy to regain its acceleration. If so, the upward trend in oil prices will return as early as next year, and we will not see a repeat of the heavy bear market of 2008 or 2014.

The FxPro Analyst Team

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