Brent oil finished last week with steady growth by 1.8% on Friday. An overall price increase by more than 8% was registered as a result of the previous week, thus allowing Brent to regain most of its losses from the beginning of the year. After such solid growth, it’s a good time to see slight correction, especially considering many reasons for it which are coming in the nearest future.
The major growth factor for oil prices is accelerating of economic growth in China after lifting COVID-related restrictions. At the same time, there’s an important event approaching in the country, which is the celebration of the Lunar New Year on January 22, and subsequent weeklong holiday. Demand for oil might become notably volatile during the holidays.
On the one hand, Chinese New Year is a traditionally popular time for travelling, characterized with higher demand for flights and, as a result, for jet fuel. On the other hand, manufacturing activity will be lower in this period due to holidays, which is a negative factor for oil prices.
It’s also important that a rapid growth in mobility of Chinese population might lead to a corresponding rapid increase in COVID cases. Although it’s clear that the Chinese government won’t bring back strict quarantine measures, the country’s citizens might reduce their mobility themselves, thus lowering fuel demand. A similar situation happened in the first half of December.
Oil prices might be pressured this week by the updated outlook of OPEC and the International Energy Agency (IEA). OPEC is expected to release its oil market analysis on Tuesday, and the IEA will publish its outlook on Wednesday. An updated forecast of the U.S. Energy Information Administration (EIA), published last week, showed a decline in the expected oil price in 2023.
The Stochastic indicators signals that oil is in the overbought zone, thus making the oil price correction even more possible. The target level of decrease will be the level of 82.5, which has proven its significance. If no new negative factors emerge, a new wave of growth for Brent oil might follow after the mentioned level of 82.5.
The following version of trading strategy might be offered:
Sell Brent at the current price. Take profit – 82,5. Stop loss – 85,5.
Traders may also use Trailing stop instead of a fixed Stop loss at their convenience.