The oil market remains relatively stable thanks to existing buffers and ongoing market adjustments. As the saying goes, the best cure for high prices is high prices themselves, since elevated costs eventually weaken demand. However, this self-correcting market process takes time. For now, the key focus remains on global crude inventories. Let’s examine the situation and develop a trading plan for Brent crude.
The article covers the following subjects:
Major Takeaways
- Demand for oil is falling due to high prices.
- Oil reserves are melting away rapidly.
- The US and China’s capabilities are limited.
- Long positions on Brent can be opened on pullbacks from $101.6 and $98.5.
Weekly Fundamental Forecast for Oil
The time is running out. This is how Donald Trump is warning Iran, implying that the country does not have much time left to reach an agreement. Otherwise, another escalation will follow. Meanwhile, the oil market is facing a race against time, too. So far, it has shown remarkable resilience despite losses of approximately 13 million bpd due to the blockade of the Strait of Hormuz. However, if the US–Iran conflict drags on for another two or three months, Brent prices will likely skyrocket.
Global Oil Demand and Production
Source: Reuters.
There are two reasons why Brent crude has failed to break records during the most severe oil crisis in history: buffers and adaptation. The former include the massive reserves that countries have accumulated in recent years, the growth of US exports, and the decline in Chinese imports. Adaptation refers to the redirection of supply flows and a reduction in demand driven by high prices or other factors.
According to IEA estimates, oil demand fell by 2.4 million bpd in the second quarter. This figure could rise significantly if higher interest rates and tighter monetary policy trigger a global economic slowdown or even a recession. However, such effects typically unfold with a lag, as monetary tightening takes time to feed through the economy.
Another concern is the rapid depletion of existing buffers. While US oil exports have reached a record high of 5.3 million bpd, there is limited scope for further significant increases. China has reduced its oil imports, although it has not drawn down its strategic reserves. Meanwhile, demand from refineries is declining—a trend that cannot persist indefinitely. Although global inventories still exist, the overall buffer situation is gradually deteriorating.
Global Oil Inventories
Source: Reuters.
According to Goldman Sachs, global oil inventories fell by 8.7 million bpd in May, which is double the average rate since the start of the conflict in the Middle East. According to the US Energy Information Administration, the pace of the decline in global inventories accelerated from 5.27 million bpd in March to 8.62 million bpd in April.
By the end of spring, the rate had accelerated even further. In the week ending May 15, US oil inventories fell by 17.8 million barrels to their lowest level in a year, including a record drawdown of 9.9 million bpd from strategic reserves.
US Crude Inventories
Source: Bloomberg.
If the Strait of Hormuz remains closed, global oil inventories could decline to critically low levels, potentially driving oil prices significantly higher.
Weekly Trading Plan for Brent
The oil market appears overly optimistic about the prospects of a peace agreement between the US and Iran. However, the two sides remain far from reaching a durable consensus. Against this backdrop, any pullback in Brent from the $101.60 and $98.50 support zones—or a move back above $107.50 per barrel—could present attractive buying opportunities.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of UKBRENT in real time mode
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