Brent has collapsed after OPEC+ meeting: Opportunity or time to stay away?
Oil prices have dropped over 9% in the past five days due to fears of increasing supply from OPEC+ and weakening global demand. Conversely, geopolitical unrest is growing as Brent crude has reached an important technical level.
OPEC+, inventories and fears of a slowdown are weighing on prices
The outcome of the OPEC+ meeting triggered a sell-off in crude oil due to the statement that the group will unwind the 2.2 mb/d voluntary cuts over 12 months, contingent on market demand for the extra volumes. This fueled market fears of oversupply.
The announcement coincided with a significant increase in oil inventories, with API inventories showing a rise in crude by 4.052 million barrels compared to the expected decrease of 1.9 million barrels.
Furthermore, recent data suggests that U.S. economic activity in manufacturing and construction is slowing, indicating potential recessionary signs.
The Chicago Manufacturing PMI plummeted for the sixth straight month to 35.4 in May, the lowest reading since May 2020.
This marks the sixth consecutive month of contraction in the manufacturing industry in the Chicago area. Over the last 45 years, a reading this low has only ever occurred during a recession. This signifies a tough environment for crude prices to increase.
Tensions and important technical level lend support
However, with regards to the OPEC production increases, close OPEC watcher like Amena Bakr suggest that the increases will not be as severe as the price action suggests.
Oil prices in the 70s. Reminder that the potential gradual return of opec barrels in Q4 will also include the compensation volumes from states that have been overproducing. So we are not even looking at a return of 180k, it’ll be a lot less. #OOTT #Opec pic.twitter.com/sWA2sTJ07Q
— Amena Bakr (@Amena__Bakr) June 5, 2024
Besides OPEC and signs of a slowing economy, there are other important factors to take into account, that will likely have more impact on prices in the mid-term.
Israel is edging closer to full-scale war with Hezbollah, according to WSJ, threatening to pull Iran into the conflict, while NATO is bombin Russia through Ukraine. This should support prices and also bring back a price premium in Brent over WTI.
Chart-wise the drop after the OPEC+ meeting halted right below the $77 level. Interestingly, this is the 78.6% Fib retracement of the move from bottom in Dec 2023 to high in April 2024. Other earlier bottoms from Nov '23 to Feb '24 also support this level.
This setup provides a fair probability for the Brent to, at the very least, retest the $80 level from below.
Lastly, it's worth to keep an eye on the dollar index, DXY, even though WTI tends to lead DXY rather than the other way around.
