This year, crude oil has been one of the best-performing assets. The price of West Texas Intermediate (WTI) has gained by 40% while that of Brent has gained by more than 30%. With these gains, investors are starting to question whether the rally will continue. This article will explain why this could happen.
First, the price of crude oil has gone up because of the supply cuts that have been championed by OPEC. This week, a report by OPEC showed that the production by OPEC had gone down to a four-year low. In March, the production declined by 534K barrels a day and currently stand at more than 30 million barrels. Saudi Arabia has slashed 324K barrels, bringing the production to 9.8 million barrels per day. This is in contrast to US daily production of more than 11.8 million barrels. This supply cut has also been helped by the involuntary cuts by Venezuela and Iran. Venezuela has seen its production decline by 289K barrels to 732K barrels. Other top countries that saw supply cuts were Iraq, which reduced production by 126K barrels.
Second, in the Middle East, there appears to be a revolution going on and the concerns are that it could spread to other countries. This has been nicknamed as the Arab Spring 2.0. Already, a number of countries have already changed their leaders. Last month, Algeria’s Bouteflika announced that he was stepping down and yesterday, Sudan’s Bashir stepped aside. In Libya, there is a crisis as two factions continue fighting in Tripoli. Therefore, there is a likelihood that the revolution will continue in other countries as their economy slows.
Third, while the global economy is forecasted to slow this year, there are no indications that this will have an impact on the demand for crude oil. In fact, reports released this week by OPEC and EIA showed that the demand for the commodity has remained stable around the world.
Meanwhile, in the United States, there are concerns that producers are not pumping as much as they could. In fact, according to Baker Hughes, the rig counts have not been growing as much. They currently stand at 831, which is lower than the December’s high of 885.
On the chart below, the price of WTI crude has eased a bit from the YTD high of $64.80 to a low of $63.30. The price is along the 21-day and 42-day moving averages while the signals line of the MACD have moved higher. Therefore, with supply tightening, the price could continue moving higher to the $70 level.