The chart on the left is FXCM's CFD for Brent, UKOil, and the chart on the right is the WTI CFD, USOil. Both charts are weekly, with their prices in bullish areas, between the upper blue and red bands. Moreover, oil is over $100 per barrel.
Consider the US total capacity utilisation (TCU) series as a proxy for demand. The current levels are higher than pre-pandemic, showing a terrific surge in demand since the lockdown period. The correlation coefficient between TCU and FXCM's UKOil and USOil CFD is 0.91, respectively. Consider global oil demand in this regard:
Demand is trending up, is above its 12-month moving average, and at prepandemic levels.However, global supply is below its pre-pandemic level as per the chart below (left). When we overlay the global demand and supply charts (right), we note an excess demand i.e. demand has recovered fater than supply since the 2020 lows:
The Russian invasion of Ukraine has further exacerbated the excess demand. Russian oil is generally shunned by buyers and is subject to sanctions in the US (in effect) and the UK (imports to be phased out by the end of 2022). As a result, the US and allies have accessed reserves to help cope with the shortfall.
Given the volatility over the last two years, oil producers are cautious about expanding. Nevertheless, the US oil rig count is at 548. This number is up from 337 a year ago. However, as reserves deplete and the conflict drags on, the excess will largely depend on the capability of producers to make up shortfalls. Until this happens, oil is likely to be supported at current levels.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.