Brent crude rolled back below $90 and, at one point on Friday, was losing 2.3% to $89, despite still worrying reports of tensions around Ukraine and Russia. It has fallen below the local support of the past ten days and is now just one step away from a decline since the start of the month.
While geopolitics remain a joker capable of playing, either way, the macroeconomic picture is working to cool the oil price.
US commercial oil inventories rose last week against a seasonally typical decline. As a result, inventories are now 10.9% lower than a year earlier, although it was -15% in mid-January.
Production stagnated at 11.6m b/d, but at the end of last week, there was an increase in the number of operating oil rigs from 497 to 516. New data will be released later this evening. Probably, we will see more evidence that producers have stepped up production, convinced of the strength of demand and record profits in many years at their disposal.
Locally, the activation of extractive companies is playing into the price pullback from current levels. However, it is a factor in slowing price growth in the longer term, but not a failure.
The vector of monetary policy is also worth paying attention to. Rising rates often derail speculative growth in oil. We saw the last two examples on this theme in 2014-2015 when oil collapsed by 75%, and in 2018, it fell by 45%. After those hard lessons, OPEC has worked much more closely to meet quotas, so we are talking about a correction rather than a new bear market for oil.
Speaking of a local correction, we assume a pullback in the Brent price to the $85 area. That is the peak area in October last year and September 2018 and close to the 38.2% Fibonacci retracement level of the rally from December to mid-February.
Deeper drawdowns are also possible if monetary tightening coincides with geopolitical détente and slowing demand. In that case, Brent might briefly correct towards $80.
Positive signals on the Iran deal are also factors holding oil back. An agreement with Iran would signal an easing of some of the geopolitical tensions in the Middle East and add around 1% to the global energy system, allowing the resulting shortfall to be digested and a smooth return to restocking for the world.