Last week, the price of crude oil jumped, with the West Texas Intermediate (WTI) and Brent reaching multi-weekly highs of $53.8 and $62.5 respectively. This was a continuation of a rally that started in December after the prices reached 15-month lows. This article highlights a few reasons why the price could continue this trend.
The first reason why the price of crude declined was that investors were worried about a slowing global economy. This was in line with the previous warnings from top organizations like the World Bank and the IMF that have continued to warn about global growth. A slowdown in growth may mean low demand for crude, which may mean low prices. However, there is a likelihood that investors’ fears about the growth were exaggerated. In fact, trade talks between the US and China are continuing and there are higher chances that a deal might be made.
At the time, the US producers were increasing production at a fast rate. This led many investors to worry about oversupply, which would have been caused by that. However, the reality is that the increased production led to lower prices, which also affected their profitability. The implications of this is that the producers may start reducing their production with the aim of rebalancing the price of oil.
In Vienna the meeting that happened in December, leaders of OPEC+ agreed to reduce supplies. The goal of this was to save the prices that were continuing to fall. Already, the outcome of the meeting has been seen. Recently, data from OPEC countries show a reduction in supply. Saudi has continued to put more pressure to the OPEC members about supplies. Therefore, there is a likelihood that the price may rise as supplies reduce and demand increase.
Canada is a major North American producer of crude. This is despite the fact that the country produces crude oil that is of a lower quality than that of other countries. This makes the crude oil relatively cheaper than that of the US and the global benchmark crude. Last year, Canada announced that it may start reducing supplies in a bid to push the prices higher. Already, this has seen some positive results from the market.
As the upward momentum of crude oil continues to be maintained, there is a possibility that speculators may start adding to their net positions. This potentially means that more investors will start buying crude oil with the goal of benefiting from the upward momentum. This is also known as the fear of missing out (FOMO). In this, they buy the crude oil because they don’t want to miss a rally that could extend for a long time.
While these scenarios could play out, there is also a possibility that the price may not rise as fast. In the past, OPEC countries have been known to cheat about their production. There is also a likelihood that the global demand will reduce. These scenarios are important because they show the importance of having a stop loss in your trading and the need to manage your risk better.