This year, crude oil is one of the best-performing commodities
in the market. Brent, the global benchmark has gained by about 30% while
Western Texas Intermediate (WTI) has gained by about 37%. The reasons for this
rally are easy to see. First, OPEC has been reducing supplies since the
December meeting. True to their word, the members, led by Saudi Arabia have
continued to slash production. Saudi alone has slashed production by more than
a million barrels a day. Russia too has announced that it intends to slash the
production.
Second, the talks between United States and China have
continued and there are indications that a deal will be signed soon. This is a
positive thing for the market because it will be a sign that demand will pick
up. The two countries play an important role in the world economy because of
their size.
Third, US production has been curtailed by the lack of
capacity. A number of key pipelines that are under construction are not yet in
use. Also, there are a few truck drivers, which means that the US cannot boost
its supply to the international markets. In a report released yesterday, Baker
Hughes said that the number of oil rigs declined to 825 from the previous
week’s 833.
Fourth, there have been involuntary supply cuts from Iran
and Venezuela. For Iran, the country has continued to see the supply reduce.
This is because many countries that were granted waivers have continued to
withdraw. The deadline of the waivers will end in May. In Venezuela, sanctions
have reduced the number of countries that buy the crude. In the Middle East,
protests have continued, which has led to the ouster of a number of countries.
However, after the significant gains, the price of Brent and
WTI appears to have hit a major resistance. As shown below, the price of Brent
reached a high of $72.27 recently. Since then, the XBR/USD pair has moved in a
sideways direction. This is a sign that there is indecision in the market about
the way forward for the price. However, since OPEC will meet again in June,
there is a likelihood that the price of crude oil may continue to move upwards.
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