View: Cautiously Bearish
Target Price: $62-64/bbl
Brent crude futures returned to two-week highs last week, where prices saw an outsized rally as the US imposed sanctions on Russian oil giants Rosneft and Lukoil for the first time. Prices reached highs of $66.78/bbl on Friday before retreating to the $65s on Monday’s open. While sentiment has become more constructive, especially with Brent spreads out of contango, we expect a short-term pullback in flat price, with Jan’26 Brent to conclude the week between $62-64/bbl.
Factors:
- Trump-Xi Summit
- Markets Pricing in Russia Sanctions
- Technical Resistance
Trump-Xi Summit
Productive US-China trade talks over the weekend have renewed the bullish impetus in risk assets. The US and Chinese trade delegation discussed a variety of topics, including export controls, shipping, fentanyl, and agriculture. Regarding concessions, China may resume “substantial” soybean purchases and defer its rare earths export controls for a year, while the extra 100% tariffs on Chinese goods threatened by Trump are likely off the table. The upbeat tone has raised hopes of an extended trade truce, creating a positive framework ahead of Thursday’s high-stakes summit between Trump and Xi. The markets have largely priced in this bullish sentiment, so any sudden shift in rhetoric leading up to, or outcome following the summit, may trigger a correction.
Markets Pricing in Russia Sanctions
Oil markets were sent into a tailspin after the US imposed its first major sanctions on Russia’s oil industry under the Trump administration. As the dust settles this week, participants are continuing to digest this news, where trade flows will be adjusted and workarounds will be found. Rosneft and Lukoil represent around 70% of Russian oil exports, including 2.7mb/d of crude and 0.9mb/d of refined products. The curbs are expected to limit the pool of Russian crude buyers, especially with the greater threat of secondary sanctions. However, we may see downward pressure on prices this week as players rebalance positions and focus on the growing crude length, where the oil glut was the previous dominant narrative. Nonetheless, we caution a potential tail risk for prices if Russia offers a meaningful pledge towards a ceasefire. Previously, the US has floated the idea of sanctions relief in exchange for Russian concessions.
Technical Resistance
Technicals have played a key role in recent price action. Intraday highs on 23 Oct peaked just below the structural 100-day moving average, while 24 Oct highs were a touch below the 200-day moving average. When panic buying ensued, these levels provided a selling opportunity. Ahead of the sanctions announcement, short money manager positioning was at an all-time high, implying the recent rally was driven by short covering flow. Moreover, we highlighted last week that CTAs were close to being max short, which limited the downside. However, last week’s rally was a mean reversion in the grand scheme of things, with the RSI maxing out at 55. Since June, prices have seen lower highs, so prices are in a medium-term downtrend. After being flushed out last week, shorts may seek to re-enter at higher levels, renewing short-term downward pressure.
