This article was written by Evdokia Pitsillidou, Risk Management Associate at easyMarkets.
The oil price surge continued this week, with Brent crude futures topping $50 a barrel for the first time in nearly seven months following a bigger than expected drop in US inventories.
Brent crude, the international futures benchmark, reached a high of $50.09 a barrel on Thursday, having rallied nearly 13% over the past four weeks. Since bottoming out at 12-year lows in January, Brent’s price has rebounded 74%.
Brent’s technical indicators suggest further upside is in store for oil prices. Relative strength is approaching 70 while the MACD shows continuing upward momentum. Price action is strong, with the 20-day and 50-day moving averages on sharp upward trajectories.
The West Texas Intermediate (WTI) benchmark for US crude also approached $50 a barrel this week. The WTI contract traded as high as $49.88 a barrel on Thursday. Since February 12 the US futures contract has rebounded a staggering 87%.
The latest rally came after US government data showed a bigger than expected drawdown in commercial crude stockpiles last week. US inventories fell by 4.2 million barrels in the week to May 20, more than double the expected drop of 2 million, the Energy Information Administration (EIA) said in its weekly petroleum status report.
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Looking at the picture more holistically, we clearly see oil prices benefiting from major supply disruptions around the world. Ongoing wildfires in the Canadian province of Alberta have seen oil-sands production decline by more than 1 million barrels per day. Meanwhile, militant attacks in Nigeria have sunk production levels to 20-year lows, while Venezuela is expected to see its crude exports fall by up to 200,000 barrels per day this year.
Rallying oil prices have also helped global stock markets recover some of their recent losses. Wall Street posted sharp advances on Tuesday and Wednesday, with the Nasdaq Composite enjoying its biggest one-day gain in nearly three months.
Despite near-record production from the Organization of the Petroleum Exporting Countries (OPEC), US oil production has declined for 11 straight weeks. Last week, total output dropped to 8.77 million barrels per day, the lowest since September 2014.
The $50 a barrel mark is considered a major threshold for oil prices. Analysts suggest that a clear break to the upside is needed to sustain an even bigger, long-term rally. Nevertheless, the latest rebound in oil breaks nearly two years of bottoming prices due to entrenched oversupply in the global market.
However, it remains to be seen whether the latest rally above $50 a barrel signifies a major reversal or is merely a product of unplanned supply disruptions among some of the world’s major producers. One thing seems clear: Iran has no intention to reduce its production or exports anytime soon. The country’s oil minister recently said that he expects Iranian crude exports to reach 2.2 million barrels per day in the coming months, up from the 2 million barrels per day Tehran is currently exporting.
OPEC is scheduled to hold its next major meeting on June 2 in Vienna. As it currently stands, the meeting is unlikely to unite the cartel around a common production strategy.