Oil Q1 2022 Fundamental and Technical Forecasts

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Oil Q1 2022 Fundamental Forecast: Crude to Avoid Bear Market as Supply Constraints Persist

The price of oil may face a bear market in the first quarter of 2022 as it falls nearly 20% from the 2021 high ($85.41). At the same time, expectations for stronger demand along with ongoing supply constraints may keep crude prices afloat as the Organization of Petroleum Exporting Countries (OPEC) plans to “adjust upward the monthly overall production by 0.4 mb/d for the month of January 2022.”

OPEC RETAINS UPBEAT OUTLOOK FOR WORLD OIL DEMAND

The upward trend in the price of oil seems to have unraveled as US President Joe Biden pledges to work with China “to address global energy supplies.” Meanwhile, the rapid spread of the Omicron variant may produce headwinds for crude as a growing number of countries reestablish travel as well as social restrictions in response to rising COVID-19 cases.

However, OPEC and its allies appear to be undeterred by the new strain as the December 2021 Monthly Oil Market Report (MOMR) points out: “4Q21 oil demand was adjusted slightly lower mainly to account for COVID-19 containment measures in Europe and their potential impact on transportation fuel demand, as well as the emergence of a new COVID-19 variant (Omicron).”

As a result, “total world oil demand is anticipated to reach 96.5 mb/d on an annualized basis in 2021.” The report goes on to say that “in 2022, world oil demand growth was also kept unchanged at 4.2 mb/d and total global consumption at 100.6 mb/d.”

The upbeat outlook is based on the assumption that “the impact of the new Omicron variant is projected to be mild and short-lived, as the world becomes better equipped to manage COVID-19.” Expectations for strong demand may keep OPEC and its allies on course as the group takes a gradual approach in restoring production to pre-pandemic levels.

SLOW RECOVERY IN US OIL OUTPUT TO KEEP CRUDE PRODUCTION WELL BELOW PRE-PANDEMIC LEVELS

Forecasts for strong demand along with OPEC’s gradual approach in restoring production may help crude to avoid a bear market, and developments coming out of the US may keep the price of oil afloat amid the slow recovery in crude output.

Source: US Energy Information Administration

US output has recovered from the disruptions caused by Hurricane Ida as production slipped to 10,00K in September. Recent figures from the Energy Information Administration (EIA) show weekly field production holding steady at 11,700K in the week ending December 10, which remains well below the record high print of 13,100K in March 2020.

In summary, the growing response to the Omicron variant may drag lower the price of oil over the near-term, but the price may avoid a bear market as forecasts for strong demand are met with a tepid recovery in global supply.

By David Song, Strategist, 25th December 2021. DailyFX

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Oil Q1 2022 Technical Forecast: Bullish Fatigue and Potential Bearish Reversal

A CASE FOR THE BEARS: BULLISH EXHAUSTION AND POTENTIAL LONG TERM REVERSAL

In the absence of a sizeable bullish catalyst, it would seem that the current long term trendline will soon come under threat. This wouldn’t necessarily be as a result of a strong bearish bias, but rather because of a slowing rate of price appreciation previously experienced as the global economy came out of lockdown and international travel resumed.

At this rate, a break below the long term trendline may simply be attributed to the passing of time as price action consolidates and would not necessarily amount to a sudden bearish bias. That being said, a prolonged period of consolidation can be symptomatic of a fatigued market which may be due for retracement and potentially even a bearish reversal, subject to confirmation.

Signs of a bullish continuation appear to be losing momentum as we witnessed a rather aggressive drop after the failed attempt to reach the 86.67/87 level – a point of historical importance as it often served as support/resistance where breaks above or below often resulted in an extended move. For reference, see the monthly chart below highlighting major inflection points in blue:  

CHART 1: BRENT CRUDE OIL (MONTHLY) HIGHLIGHTING MAJOR SUPPORT/RESISTANCE LEVEL

Chart prepared by Richard Snow, IG

Retracements during the early stages of the existing bull run were rather small before frantically continuing higher. This is often seen in strong trending markets, whereas more recently, retracements have become sharper and more pronounced - signaling possible fatigue.

POTENTIAL ‘HEAD AND SHOULDERS’ PATTERN THREATENS CURRENT BULL RUN

The weekly chart helps to visualize a developing (but not confirmed) long-term reversal pattern known as a ‘head and shoulders’ formation. Should prices move sideways we may see somewhat of a complex right shoulder as price action oscillates up and down. A move below the trendline followed by a retest may set the scene for a move towards $70. The slanted neckline with a price of around $66, presents a crucial decision point as a breakdown of this level with continued momentum strengthens a long-term bearish reversal trading bias.

CHART 2: CRUDE OIL (WEEKLY) HIGHLIGHTING POSSIBLE H&S FORMATION

Chart prepared by Richard Snow, IG

A Case for the Bulls: Partial Recovery from Initial Omicron Scare Brent crude oil prices failed to retest the 86.67/87 area as bearish momentum gained strength on the back of the Biden’s coordinated SPR release followed by the outbreak of Omicron. Since then, there has been a considerable recovery as prices initially broke below the long-term trendline support but almost immediately recovered.

Current levels (as of 15 December 2021) have only partially recovered recent losses and crude trades just above the long term trendline so if there is to be some sort of bullish revival it needs to happen soon. The first real test remains 77.50, then 80 before any retest of the October high can be entertained. All of these levels seem rather distant but should not be disregarded.

By Richard Snow, Analyst, 26th December 2021. DailyFX