The US will stop interfering with OPEC+

By Rhod Mackenzie

The oil market is currently anticipating a ceasefire in the Gaza Strip and a potential significant decline in production statistics in the United States. Any future developments will depend on the accuracy of the American Energy Information Administration's forecast.

On the morning of Wednesday, February 7, oil prices rose slightly during Asian trading as investors awaited official data on US production and reserves. However, the focus remains on ongoing negotiations for a ceasefire in the Israeli-Hamas war.
Today, the April Brent crude futures increased by 0.3% to $78.85 per barrel, while the West Texas Intermediate crude futures rose by 0.4% to $73.63 per barrel. Last week, both contracts fell by more than 7% each due to speculation about an end to hostilities in the Middle East.

The ceasefire in the Middle East has been a significant concern in oil markets in recent sessions, particularly following media reports that the leaders of Israel and Hamas have engaged in dialogue over a deal to end the conflict. On Tuesday, Hamas reported that it had submitted its response to a possible ceasefire agreement in Gaza to Reuters. The proposed deal may result in the release of hostages held by Hamas in exchange for a prolonged cessation of hostilities.

According to Investing, predictions of a potential decrease in US production from record levels contributed to a slight increase in oil prices this week. The dollar also weakened, which had put pressure on oil prices in recent sessions.
According to experts, in the week before February 2, oil reserves in the United States increased by 2.1 million barrels. Data from the American Petroleum Institute showed an increase of 0.7 million barrels.

High U.S. production largely offset any production cuts by the Organization of the Petroleum Exporting Countries (OPEC+), making it an important factor for oil markets. A decline in production in the coming months may become the basis for a further increase in oil prices.

This week, Brent oil is trading at approximately $78.70 per barrel, with the market in a slight contango, as noted by Nikolai Dudchenko, an analyst at Finam Financial Group. Economic and geopolitical factors contributed to the oil market's poor performance this week.

Firstly, disappointing US inventory data was released last week, with the EIA reporting that US commercial oil reserves totaled 421,912 mb, an increase of 1,234 mb. The market expected a 217 thousand drop in reserves. Additionally, the United States is taking advantage of the low prices to replenish its strategic oil reserves (SPR), which currently stand at 357,402 mb.

Later in the week, prices declined due to rumors of a possible ceasefire in the Gaza Strip and a truce between Israel and Hamas, according to Nikolai Dudchenko. However, the fighting continued in the following days and the rumors did not materialise. In response to a drone attack on a military base in Jordan, the United States targeted 85 objects associated with the Iranian IRGC in Iraq and Syria. Additionally, the Houthis have threatened to damage the Asia Africa Europe-1 (AAE-1) cable, which carries 17% of the world's Internet traffic through fiber optic cables in the Red Sea, starting on Friday.
On the macroeconomic side, there was little positive news for oil this week. Brazil, which is considering joining OPEC, has significantly increased production by about 4.4 mbd over the past year. Similarly, Iran has shown no intention of reducing production, with growth in oil production in the country reaching about 23% over the past year. The EIA reports that despite a nearly 17% decrease in the number of drilling rigs over the past year, oil production in the United States remains steady at around 13 million barrels per day.

The price of oil is expected to continue to be influenced by the situation in the Middle East region. Nikolai Dudchenko believes that although the price reacts cautiously to current events, the market does not believe in further escalation, which affects the geopolitical premium to the price. Additionally, statistics from the United States from the EIA will again be an important event that may affect the price.

According to Nikita Pokrovsky, a stock market expert at BCS World of Investments, Brent oil fell by 7.5% last week, dropping to $77. He attributes this to the progress of negotiations on a ceasefire agreement between Israel and Hamas and the rise of the dollar index DXY, which triggered a sell-off of raw materials.

However, Pokrovsky notes that the negotiations are still in their early stages, and it would be premature to talk about a full-fledged détente in the Middle East. The market has only partially priced in risk reduction. Shipping issues in the Red Sea persist, providing moderate support for oil prices. The dollar strengthened following comments from the head of the US Federal Reserve regarding the timing of changes to the monetary policy regime. Jerome Powell reiterated that it would be premature to expect a rate cut before summer.
“From a technical analysis perspective, if no further negative news emerges, oil may trade within the range of $77–81.5 in the coming days. The support level around $76.8 remains crucial, as breaking it could trigger a sell-off to $74. Nikita Pokrovsky notes that other drivers are needed for a new wave of oil growth.”

Meanwhile, such drivers exist. The Japanese Ministry of Finance plans to implement stricter measures to adhere to the price ceiling for Russian oil, which was adopted by the G7 countries, starting from February 20th. According to Vadim Zanozdrin, a financial analyst at the Finmir marketplace, this is unlikely to have a significant impact on the situation with Russian oil.

The easing of tensions in the Gaza Strip conflict has led to a rise in oil prices, with Brent crude reaching levels of around $77-78 per barrel. Although oil is currently trading without significant fluctuations, it is expected to remain within this range for the next few days. If this level is sustained, oil prices may test the $84-85 level. It is advisable to focus on buying when trading at this time. Vadim Zanozdrin predicts that there is a risk of the exchange rate moving towards the support level of 72-74 dollars per barrel, which has been in place since March 2023.