The price of black gold has been rising on world markets over the past week. The WTI crude oil price surpassed $70 a barrel. This is the first time in 2.5 years. Why is oil rising? And what to expect from it in the short term?
API data showed another drop of more than 2 million barrels in US oil inventories. The start of the summer season in the Western Hemisphere and the increased demand for petrol from motorists are having an impact. Optimism about this continues to drive prices higher.
The second reason is the hope, not only of investors but of everyone in the developed world, that the COVID-19 pandemic is effectively over. The daily rise in new infections continues to steadily decline. Government health officials are making high-profile statements. The head of the Norwegian Ministry of Health, for example, has expressed the opinion that “the pandemic is largely over”.
We will see epidemic outbreaks in developing countries for a long time to come. But they will not have a global impact on demand. The topic of coronavirus is likely to recede into the background in 2022.
At the same time, according to the latest report from the EIA, the forecast for a recovery in US shale oil production in 2021 and 2022 has not changed much. Which gives support to black gold. After all, the rapid growth of shale production has completely tied OPEC’s hands.
What could prevent the oil price from rising further?
The main risk factor is the OPEC cartel itself. Its overcapacity is more than 5 million barrels a day. It is clear that all this idle capacity, sooner rather than later, will start pumping oil again. This will immediately lead to a surplus of supply over demand.
At the moment, OPEC’s large under-utilisation of capacity is fully incorporated into the price. Therefore, risks are constantly hanging over the market and speculators are trying to ignore them. Before the next OPEC meeting, however, there could be strong pressure on the price of black gold. In fact, many traders will want to lock in profits on the back of the most favorable situation.
It is also important to understand the following. The spread between the benchmark grades of Brent and WTI has narrowed to just $2 a barrel. Historically, when that happens, the market is near its highs.
What will outweigh it in the end? We will find out in the next couple of weeks.
06.30 Japanese industrial production for April
11.00 EU industrial production in April
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