Brent Crude Oil Outlook

OPEC cut its oil demand forecast again while the IEA has increased its own as European customers replace Russian gas with oil. Is Brent crude destined for a return to pre-war levels or is another rally in sight?
----------------

Demand is slowing

Earlier this week, Brent popped below the $95/bbl mark, with some suggesting that the era of triple-digit prices might be over. Indeed, the price has been on the decline since the middle of June. However, It's still well above the ~$75/bbl it was at before fears of a conflict in Ukraine started driving the price higher.

While souring forecasts can be attributed to fears of a recession, there is some concrete evidence of demand destruction. As prices rise, US drivers consume less. A study by the AAA showed that the majority of Americans are choosing to cut back on driving because of the high prices. Gasoline demand is on par with pre-pandemic levels of 2020. They say the best cure for high oil prices is high oil prices!

Is there enough supply?

According to the monthly IEA report, the Russian oil supply has been higher than anticipated with continued demand from mainly India and China. That has helped offset the issue of increased demand in Europe during the summer heat wave. Unlike OPEC, the IEA raised its forecast for crude demand. However, the IEA was starting from a lower base: raising projected demand from 99.7M bpd from 99.2M bpd prior. This is approaching OPEC's assessment of 100.0M bpd. Both see global supply peaking out at 100.1M bpd.

Aside from potential supply shocks from geopolitical or even natural events, a sustained change in crude prices will likely depend on the demand side. European factories such as Mercedes Benz already setting up contingencies for lack of energy supply and governments are warningof possible ‘energy rationing’. Both would imply reduced demand in expectation of fuel shortages.

Brent bounced at golden pocket

Brent oil’s August low at $93.50 received bullish support at the 61.8% Fibonacci retracement of $66.00-138.00 upward leg. Further gains could meet resistance at the 50% or 38.2% equivalents at $102.25 or $110.00, if not earlier. The latter resistance would need strong momentum as bulls will have to get past the 200-day SMA at $105.00.

The recent bounce has left a false break below the horizontal support that connects the mid-March and mid-July lows at $97.00. If bears attempt to revisit the said level below the key SMAs, prices could fall towards $90. From there, there is no decent support until down to $76.50.

Key takeaways

Brent is still above pre-war levels, but it's dropping and there are signs of demand destruction as people are cutting back on driving and companies are adjusting production to prepare for fuel shortages.

OPEC and IEA see supply peaking at the same levels and no major oversupply pressures, but Russia's supply has exceeded expectations already. The IEA increased the outlook for crude demand, while OPEC cuts its own demand outlook.