Brent forecast – Stock market support vs 70
Last week, Brent was lacklustre, as predicted. This week, we expect much of the same, albeit progress in US trade deals could give oil some pep. Trade deals were recently made with the EU and Japan. The S&P500 was lifted to over 6,400 on Sunday night following the halving of European tariffs. We expect support in the stock market, from progress on trade deals, to spill into the crude markets. This is currently the main ‘outside’ force on the market sentiment, but technical and fundamental headwinds and the lack of clarity in the China-US trade deal may be preventing support. We expect the themes below to guide price direction and support M1 Brent to settle the week between $69-71/bbl. Key factors this week include:
- Trade deal progress
- Technical support in low volatility
- Strong but more risk-off net positioning
European Commission President Ursula von der Leyen defended the trade agreement reached with the United States on Sunday, describing it as “the best we could achieve” and warning that it should not be underestimated, especially in light of the looming threat of 30% tariffs that had been hanging over the EU. She stressed that the deal creates ‘certainty in uncertain times, delivers stability and predictability’. The trade deal with China, or lack thereof, remains the elephant in the room. This is not subject to the 01 Aug deadline, as is looming for other countries, but 15 Aug, as they resume talks today. Progress on this deal could be the missing puzzle piece for Brent strength.
Technically speaking, M1 Brent has been sandwiched between the 100 and 200-day moving averages (light and dark blue lines on the graph) throughout July in uninspiring price action. The volatility in the contract has dropped quite severely last week, with the Bollinger bands pinching in, indicating a breakout. For a rally to be sustainable, it must pass $70/bbl. This has been a serious hurdle over the past few months, with the series of higher lows providing a trending support level in the uptrend – shown in a dashed white line on the graph. Fundamentally, looming stock builds expected by the forward balance may also provide some headwinds to strength.
Strong net positioning has been supportive of price action, although there has been a w/w drop. In Brent, managed-by-money participants were risk-off in the week ending 22 Jul, following the previous week’s bullish positioning changes. Long-positioned speculators removed 13.7mb (-3.9%) from their length, and their short-positioned counterparts liquidated 2.1mb (-1.9%) from their shorts w/w. Even after this w/w reduction, fund net positioning is strong at 227mb, nearly 50% above the y/y average of 151.7mb. This continued bullish fund positioning shows speculative players expect this uptrend to continue.
