The Current Situation in Crude Oil Market
Crude oil is one of the main players in the commodity market and has a meaningful role in determining the effectiveness of the commodity market. It is a crucial raw material for various industries, including transportation, manufacturing, and petrochemicals. As a result, the price of crude oil has a direct impact on the cost of goods and services, inflation rates, and the overall health of the global economy.
Moreover, crude oil is a highly traded commodity in financial markets. Mostly, the price is determined by geopolitical events and demand changes. As a result, traders and investors closely monitor oil prices and frequently trade oil futures contracts to capitalize on price movements.
Recently, the crude oil market has been in focus due to the supply-demand imbalance caused by the COVID-19 pandemic. This has led to significant price gaps, with oil prices dropping to record lows in 2020. To address this, the OPEC+ alliance has agreed to production cuts, which have helped to stabilize prices.
In this article, we will discuss the recent situation around crude oil price gaps and how the OPEC+ cut may fire up oil prices. We will also explore other factors that impact the price of crude oil and why it remains a meaningful asset for trading.
Everything about Crude Oil Assets
The list of factors that determine the price of crude oil is very long and changeable. Down below we will show you those which have the highest influence on the prices of the asset:
- Global Economic Activity: Economic growth, industrial output, and consumer spending are critical determinants of oil demand. When economic growth slows down, demand for oil declines, resulting in lower prices.
- Geopolitical Tensions: Political instability, civil wars, and conflicts in oil-producing regions can impact oil supply, leading to higher prices. Such as the tense relationship between the US and Iran had an important influence on oil prices.
- Production Levels: The level of oil production by oil-producing nations, including OPEC members and non-OPEC countries, impacts the oil supply. Higher production levels result in an oversupply of oil, leading to lower prices, while lower production levels lead to a supply shortage, leading to higher prices.
- Currency Fluctuations: Oil is priced in US dollars, which means that USD has one of the biggest influences on oil prices. If the value of the currency will be stable and strong, the oil price will be reduced.
- Seasonal Variations: Weather patterns and seasonal variations can impact the demand for oil. For example, during the winter months, demand for heating oil increases, leading to higher prices.
The reputation of crude oil as a trading and investing asset is mixed. Mostly it is considered a risky option for personal commodity trading. In addition, the global supply-demand dynamics of oil can be complex, making it challenging for traders and investors to accurately predict price movements.
Despite these challenges, many investors and traders continue to trade crude oil due to its potential for high returns. However, it is important to note that crude oil prices can be affected by unexpected events, including geopolitical tensions and supply disruptions, which can lead to significant price fluctuations. As with any investment, it is important to conduct thorough research and exercise caution when investing in crude oil.
Current Situation for Crude Oil
After the surprise announcement of an output cut by OPEC+ over the weekend, crude oil prices surged over 8% higher on Monday morning. The rally follows a 9% surge in the price of black gold the previous week. While prices have since eased off, thin liquidity within the market may have exacerbated the initial move.
Reports suggest that OPEC+ officials had previously hinted that there would be no near-term production cut. However, the syndicate has now announced a cut of over 1 million barrels per day. This comes on top of the news that Turkey will no longer be able to source oil from Kurdistan due to an international court of arbitration ruling, reducing global markets by an estimated 400k-450k barrels per day from that source.
Russia has previously stated that it will maintain its production cut of 500k barrels per day through to the end of the year. Within OPEC+, Saudi Arabia will do most of the heavy lifting, lowering its production by 500k barrels per day. It is suggested that OPEC+ may be looking at the Fed rate hike cycle to slow down economic activity in the world’s largest economy.
The announcement may be somewhat ironic, as the squeeze on oil supply could contribute to inflationary pressures that could see the Fed reassess it’s tightening measures. US spokesperson for the National Security Council said, “We don’t think cuts are advisable at this moment given market uncertainty.”
China’s move out of pandemic restrictions has not led to the boost in global economic activity that many had hoped for and may have also played a role in the decision. The unorthodox announcement from the cartel comes a day ahead of the OPEC+ monitoring committee meeting.
While the WTI futures contract topped out at US$81.69 bbl in early trade and the Brent contract touched US$86.44, both contracts have retraced lower since making those highs. Despite its volatility, crude oil remains a widely traded commodity, and its price movements will continue to be watched closely by traders and investors.