Has Crude Oil Peaked?

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 the 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 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 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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