This week, crude oil has been among the worst-performing assets in the world. The West Texas Intermediate (WTI) declined by more than 9% while Brent declined by almost 8%. This was the sharpest drop this year.
There are two key reasons for this price action. First, traders are worried about the ongoing tussles on trade. They believe that as the war goes on, the demand of crude oil could weaken. In theory, the price of crude should fall when there are uncertainties. However, in reality, this tends not to happen. For example, in modern times, the price of oil reached a low of $26 in 2016, in a period when the global economy was strengthening.
Second, there are concerns about the increasing inventories in the United States. Rising inventories is usually a signal of oversupply. This week, data from the American Petroleum Institute (API) said that the inventories of rose by more than 2 million barrels. In the following day, data from EIA showed that inventories rose by more than 4 million barrels. The data said that inventories were now more than 476 million barrels, which is 4% above the 5-year average. In the previous week, the country imported more than 6.9 million barrels per day, which was 669K lower than the previous week. On average, the imports averaged about 7.2 million barrels per day. In the previous week, refineries operated at 90% of their operable capacity.
While the crude price could continue to fall, there is a major catalyst for an upside. Early in June, OPEC leaders will meet in Vienna for their annual general meeting. In the meeting, they will discuss about whether to increase or reduce supplies. In light of the ongoing issues, there is a likelihood that the members will support slashing supplies or leaving them as they are. This could see the price resume the upward trend.
This week, the XTI/USD pair has declined from a high of 63.90 to a low of 57.30. On the chart below, this price was along the 21-day moving averages and slightly below the 42-day moving averages. The RSI has stabilized from a low of 8 to above 50. While the pair could continue moving lower, the upcoming OPEC meeting provides an important catalyst that could see it move higher.