Brent Closed the Upside Door Above $80

Brent crude prices fell by 2.7% to $76.43 per barrel, marking a 7.5% decline from the January 15 high of $82.77. Downward pressure remains strong, with prices breaking below the key support at $78.00–$80.00 per barrel and successfully retesting this level.

From a technical standpoint, oil prices are likely to continue declining towards the $68.00–$70.00 range. Several factors indicate that this downside scenario is in play. U.S. President Donald Trump has urged OPEC to lower oil prices as part of his strategy to pressure Russia into peace negotiations over Ukraine. His logic suggests that lower crude prices would weaken Russia’s financial position while also disrupting the OPEC+ alliance, allowing the U.S. to replenish its strategic oil reserves at lower costs.

Declining oil prices could also ease inflation, pushing the Federal Reserve (Fed) to adopt a more aggressive rate-cutting stance, thereby stimulating the U.S. economy. However, OPEC nations would face economic strain, potentially forcing them to reestablish the OPEC+ agreement to stabilise prices. OPEC ministers have signalled their commitment to maintaining existing production plans and are preparing for their February 3 meeting, where they will discuss a potential production increase in April.

Despite Trump's pressure, OPEC is unlikely to act immediately. Ministers may choose to delay decisions, particularly given signs of a weakening global economy. China's latest PMI data has been disappointing, with the Manufacturing PMI slipping into contraction at 49.1 points and the Services PMI falling to 50.2, just above contraction territory. As one of the world’s largest fuel consumers, a decline in China's crude imports could lead to a significant drop in oil prices, especially with OPEC+ maintaining steady supply levels.

Further downside risks come from signs of a slowing U.S. economy. The Atlanta Fed's GDPNow model projects Q4 2024 GDP growth at 2.3% quarter-on-quarter, down from 3.2%, while official estimates place growth at 2.7%, down from 3.1%. Historically, the first quarter tends to be weaker, which could accelerate bearish expectations. U.S. crude inventories also increased by 3.463 million barrels, exceeding the 2.2 million barrel forecast. This marks the first stockpile increase after nine consecutive weeks of declines.

Large investors are also positioning for further downside. The United States Oil Fund (USO) recorded net outflows of $120.3 million last week. However, traders remain cautious about increasing short positions due to uncertainty surrounding Trump’s proposed tariffs on imports from Canada and Mexico, set to take effect on February 1. If these tariffs are not implemented, oil prices are likely to continue their decline. Conversely, any tariff hike could briefly push prices higher.