When the global economy turns off the V-shaped recovery road, it is difficult to expect oil prices to rise as quickly as they did from January to June. In July, Brent and WTI bulls began to experience serious problems due to the spread of the delta variant of COVID-19 and environmental disasters in China, the United States, Argentina, Turkey, and other parts of the world. This makes investors worry about the outlook for global GDP and heightens rumors that the black gold market is shifting from a growing deficit to an unexpected surplus.

From the levels of the July highs, the quotes of futures for the main grades fell by 11%, moving into the territory of correction. No one can guarantee that they will not go down 20%, which technically means the beginning of a bear market. All the more so when speculators have been building up oil shorts for 6 of the last 8 weeks.

Black gold was only briefly helped by news from OPEC+, which, according to Reuters, does not see the need for an accelerated increase in production, which is what Joe Biden and his team are calling for. The bulls on Brent and WTI do not find support in the news about the approach of Hurricane Fred to the coast of the Gulf of Mexico. Usually, the raging water element threatens to disrupt the supply of black gold and contributes to a short-term price increase. This time, investors' heads are filled with something completely different.

The biggest concern among buyers of Texas and North Sea varieties is China. Not only is its economy slowing down due to the spread of COVID-19 in the cities and because of floods, but Beijing is also using administrative actions to stifle oil demand and thus limit price increases. The authorities use two main tools: they draw black gold from strategic reserves and limit quotas for private oil refineries. As a result, refining in July for the first time since May 2020 fell below 14 million b/d.

Dynamics of oil refining in China

As for the use of reserves, this information was not disclosed by Beijing. However, simple math suggests that China has been drawing oil from them for the fourth consecutive month. In particular, in July, domestic production amounted to 6.87 million tons, while imports at 41.24 million tons, which gives 58.11 tons available for processing. In fact, the figure was 59.06 million. This allows Reuters to assert that 223,700 b/d were taken from the strategic reserves.

China's desire to slow down the growth of Brent and WTI by administrative methods is understandable, because the higher the prices, the more difficult it is for the economy to recover. However, history shows that emerging imbalances do not do anything good. According to JTD Energy Services, global demand will recover over time if new variants of COVID-19 do not lead to lockdowns.

Technically, Brent's inability to overcome the support at $68.6-$69 per barrel, identified by the pivot level and fair value according to the Market Profile, may indicate the weakness of the bears. At the same time, the growth of quotes above $71.2 will give rise to purchases of the North Sea variety.

Brent, Daily chart