Has the Price of Oil Stabilized?

Crude Oil had a very impressive rally last week after it reached a 10-month low. However, year-to-date Crude Oil has had a negative performance being down -20.30%. Despite several attempts from the OPEC nation to stabilize the Crude Oil prices has continued to slide reaching a low of $41.07 per barrel.

Following the OPEC meeting in Vienna, Austria on May 25 the oil-rich nation have decided to extend the production cut by 1.8 million barrels per day by 9 more months in an effort to stabilize the oil price. Many Wall Street analysts believe that in order to combat the oil supply glut the production cut efforts aren’t enough to stabilize the oil prices.

“If OPEC doesn’t balance the market, the oil price will have to force it somewhere else, most likely in U.S. shale. For a chance of a balanced market in 2018, the U.S. rig count can no longer grow and possibly needs to contract ~150 rigs. Given current break-evens, this requires WTI between $46-50,” said the Morgan Stanley analysts – citing MartWatch.

In order for the crude oil prices to stabilize at $50 per barrel the market needs an extra 200,000-300,000 barrels of oil production cuts or the current OPEC oil cut agreement to be extended until the end of 2018. The current production cut is set to be enforced only until March 2018.

The oil supply imbalances have kept oil prices under pressure since 2014. However, more recently the US oil stockpile built up has been the catalyst for lower oil prices. According to the recent report from the Energy Information Administration-EIA the US oil output is at 9.3 million barrels per day on average and is expected to reach 10 million barrels per day in 2018. According to the same EIA report the OPEC oil output averages 32.3 million barrels per day so far in 2017 and is forecasted to reach 32.8 million barrels per day in 2018.

From a technical perspective, the crude oil prices have been quite volatile, producing sharp sell-offs quickly followed by strong recoveries. The bias remains to the downside as long as the current lower highs and lower low pattern remain intact. Usually, big price ranges are followed by narrow ranges and soon oil price can stabilize in the mid-50s price which is also the midpoint of the current price range.
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