Expect the best, but prepare for the worst. As much as investors would like the glass to be half full, the pessimistic forecasts of authoritative organizations are forcing oil markets to ignore supply concerns and focus on slowing global demand. How else, if OPEC cut the estimate of the increase in the indicator by 100,000 b/d to +2.5 million b/d in 2022 and to +2.2 million b/d in 2023, coupled with weak statistics from China, this forced Brent collapse to $92.5 per barrel.
The whole world knows firsthand how COVID-19 affects the economy. What the global recession 2020 is worth. Now China is following this thorny road, the deterioration of the situation, which is pushing global GDP to a new recession. In October, retail sales in China decreased by 0.5%, industrial production growth slowed, and real estate investment continued to fall.
Dynamics of Chinese indicators
China is the largest consumer of oil, so it is not surprising that the outbreak of COVID-19, an increase in the number of infections, lockdowns and a reduction in economic activity are dragging Brent down.
China is far from the only dark spot on the map of the global economy. According to Bloomberg forecasts, the eurozone's GDP will shrink by 0.1% in 2023. And that is subject to a mild winter and large-scale fiscal incentives to combat the energy crisis. If the governments of the countries of the currency bloc fail and frosts come to the eurozone, the economy may sink by 3.3%. As for the US, the basic scenario here is a 0.7% GDP growth with a recession in the second half of 2023. The housing market crisis and the Fed's overly aggressive monetary restrictions will lead to a deeper and longer recession.
Thus, the situation in the key economies of the world leaves much to be desired, while the IMF warns that it may worsen due to inflation and the armed conflict in Ukraine. As a result, global oil demand will suffer, expectations of which rightly lead to a peak in Brent.
As for supply issues, investors are ignoring them due to the increase in maritime transport of oil from Russia to the highest levels since 2017. Buyers seek to increase imports ahead of the EU embargo.
Dynamics of sea transportation of oil from Russia
In my opinion, a significant part of the negative is already embedded in Brent quotes. For a long time, investors have been talking about a recession, the most aggressive federal funds rate hike in decades. If the Fed succeeds in giving the US economy a soft landing, warm weather in Europe keeps the recession short and shallow, and China can weather the COVID-19 pressure as other countries have, demand for oil will be higher than expected. And with it the prices.
Technically, on the daily chart, Brent falling below $92.5 per barrel will activate the 1-2-3 pattern and become the basis for short-term sales. Subsequently, we use the rebound from $91 and $89.2 to fix profits and medium-term purchases.
