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Why The Oil Price Rally May Soon End

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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Oil Prices Turn Corner After WTI Dips Below $45

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After passing the ever-important psychological US$50-a-barrel threshold in a downward direction earlier this week, international benchmarks continued their slide on Tuesday, with Brent crude hitting a new low of US$47.05 a barrel at 03:35 AM GMT (11:35pm EST), with West Texas Intermediate dropping to US$44.14 a barrel, both down by around 3 percent from yesterday’s close.

But by 10:30am EST, oil prices began to lift, with WTI trading up 1.43 percent on the day at $46.17 and Brent Crude trading up 1.51 percent on the day at $49.11—still below that important $50 threshold.

Some analysts, as quoted by Reuters, believe the downward trend, which has sent prices to levels last seen before OPEC and 11 non-OPEC producers agreed to cut production to rebalance the market, highlights the organization’s complete failure to achieve its goal; the cumulative price drop since January was some 17 percent despite the cuts as of 11:35pm EST.

Others, as quoted by the BBC, see the drop as an indication of “jittery” markets ahead of OPEC’s May 25 meeting when an extension of the original cut agreement will in all likelihood be announced. This week’s price drop is the sharpest since February 2016, when WTI prices dipped below US$30 a barrel.

There seems to be widespread and growing worry that even if OPEC and its non-OPEC partners agree to extend the cut for another six months, this will still not be enough to rebalance supply and demand on global markets. Related: All Eyes On Saudi Arabia As OPEC Begins To Unravel

In fact, some analysts, interviewed by CNBC, believe that now that the slide has begun, benchmarks could reach new lows soon, with the support level for WTI seen at US$42.

One of the main reasons for this is the persistent growth in U.S. oil output. Another reason is that not all OPEC members can actually afford an extension, even if they are willing to do their bit for the common goal. This substantially increases the chances of one or more participants cheating, betraying the purpose of the extension, and that’s in case everyone even agrees to the extension, which is by no means certain when it comes to non-OPEC producers.

By Irina Slav for Oilprice.com

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  • Jman2522 on May 05 2017 said:
    Not all opec members can afford an extension? Do you think they can afford not to? Selling an extra couple hundred thousand barrels at half or even 30% less than today's current value is losing more money than an extension

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