The oil market remains under pressure for the third week in a row. During this time, the quotes sank by more than 7%, correcting from $75 to $70.
The spread of the coronavirus Delta variant around the world weighs on oil prices. Investors are seriously concerned that the deteriorating epidemiological situation may result in new restrictions in many regions, which, in turn, will immediately affect the demand for fuel.
The biggest fears so far are related to the economic situation in China. The industrial production, retail sales and investment data released on Monday showed that another outbreak of infection and extreme weather conditions had caused a slower-than-expected growth of the world's second-largest economy.
China's industrial production contracted from 8.3% to 6.4% last month. Retail sales rose 8.5%, far lower than the forecast 11.5%. Investment growth slowed from 12.6% to 10.3%. Since China is a key oil consumer in the world, market participants believe that a further deterioration of the epidemiological situation in China may result in a decrease in global oil consumption by more than 3%. If these fears materialize, the oil market will face a period of a major sell-off. Oil consumption in India hasn't returned to its pre-crisis levels either due to another outbreak of coronavirus. In addition, India began to sell oil from its Strategic Petroleum Reserve (SPR) to state-run refiners, indicating a drop in demand in the domestic market.
Speaking of the long-term outlook for oil, it is also worth noting that the decline in prices will be driven by OPEC+ oil production increase, which may shift the balance towards an excess supply.
This week, additional pressure on prices came from The Wall Street Journal's comments on the Fed's plans to start scaling its $120 billion a month quantitative easing program. According to WSJ sources, the Federal Reserve is considering a complete halt of quantitative easing by mid-2022, while the decision to start tapering may be made as soon as September. The refusal of stimulus for the US economy can trigger a sell-off in all risky assets and oil is no exception. That being said, we recommend holding short positions in Brent with a target at $65 per barrel. Given the oil's average daily volatility over the past month, this target can be achieved in the next two weeks.