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The following guest post is courtesy of Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).
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Oil markets show signs of optimism into the next OPEC meeting due on May 25th.
The price of a barrel of WTI plunged by 23% in April, on worries that the OPEC’s outcome cut program couldn’t reduce the global supply glut in the first quarter of 2017. Meanwhile, the gradual rise in the US oil inventories until mid-April fueled worries.
While investors were questioning whether the $60 level could be reached in the continuation of the Trump-induced reflation trend, the price suddenly started tumbling by mid-April and hit the bottom at $43.90 on May 4th.
The short speculative positions advanced to the highest levels in five months, pulling the non-commercial investors’ appetite lower from a record high reached on February.
The unexpected and rapid debasement in the oil markets pushed the world’s leading producers to reiterate their commitment to the production cut. OPEC hinted at the extension of the output cuts on May 25 meeting, as Russia and Iran said to align with whatever decision is taken by the OPEC members in terms of production cuts.
On top, the US oil inventories began contracting and printed gradual declines in oil inventories for five consecutive weeks. The biggest drop since January was recorded on the week to May 10; 5.2 million barrels.
WTI traded above the short-term critical level of $48.78 (major 38.2% retracement on April – May decline). The bullish reversal paves the way toward the next natural stop, $50.
Rising speculations that the OPEC would announce additional measures to sustain the price recovery and the sharp unwind in the positive speculative positions, suggest that there is potential for a recovery to $50.
Nevertheless, the topside remains uncertain. Buyers will likely face the real challenge between the $50-$55 area. The positive performance in the oil markets will certainly depend on investors’ conviction regarding the OPEC’s ability to control the global supply levels and regulate prices.
What investors want is not only an extension of cuts for another six months, but deeper cuts if needed.
More importantly, the output cuts were not fully reflected in the group’s exports data in the first three months of the year. In fact, the OPEC and non-OPEC countries managed to cut the daily production by 1.4 million barrels per day, but the exports fell by roughly 1 million barrels a day. The latter explains why the production cuts are no longer enough to convince investors for sustained recovery in prices.
While an agreement to reduce production should not be a problem, tightening exports could raise tensions at the heart of the group, given that the low oil prices have taken their toll on producers’ finances since nearly three years.