I guess most of you know what happened to oil this week. It went through the roof at the very beginning of the week, to slightly reverse in the second half of the week. Why did that happen, and what can we expect next?
First, why did oil rise higher? The Russian aggression on Ukraine and, consequently, a ban on Russian oil. Not only a ban but also a stand by many countries to relieve themselves from Russian oil and not supply their unpredictable war machine with taxpayers’ money. Understandable. If the only huge supplier is out of the market, that means an increase in the commodity price.
Almost all wars which involve oil-producing countries have the same effect. Oil surged during the Gulf War as well. But what happened after the Brent price almost touched the $140 mark? The price dropped like a rock. Why? Well, Russia is not the only country producing oil in the world. Almost all countries in the Gulf region, US, Canada, Mexico, Algeria, etc. There’s also Venezuela and Iran, even though both of those countries were sanctioned and their oil production was limited.
The Russian invasion of Ukraine has opened a window. A slight relief from sanctions and the ability to pump more oil into the global system. That rumor successfully stopped the skyrocketing price of oil. Now, look at this from the other perspective. If you’ve been trading for some time, you’re aware of OPEC's influence on the oil supply. The first thing to point out is that the current price is very attractive and another is that various countries are now looking to replace Russia with another supplier.
This is a fantastic opportunity for many OPEC countries to sign lucrative contracts with new countries. For this, they would have to increase their supply, which would be another bearish factor for the oil price. In a nutshell, any rumors that OPEC will increase production will negatively influence the "black gold" price.
Last but not least is the technical side of the market. Currently, Brent is creating a huge head and shoulders pattern (blue). The neckline of this formation (orange) is still intact, so there is no sell signal, but the price closing a day below the orange line will trigger one. As long as we stay above the orange support, buyers are still slightly winning this battle.
