Crude Oil is Not Reacting Well to a New Production Cut

May 29, 1:13 pm
Crude Oil

If you were following and reading our previous article, you should not be surprised about why Crude Oil prices lost more than 2% last week.

Despite the fact that OPEC has agreed to extend the output cut for more than six months, Oil failed to rally. OPEC even agreed to extend the deal for nine months until March of next year. Yet, Oil failed to rally.

Why Crude Is Not Reacting Well

We mentioned and warned about this many times during the past few weeks and months. We noted that an extension of the current deal is an old news, despite the fact that the nine-month extension is a good news and something new.

The deal is already priced in; the talks about an extension have been there since January when Crude Oil failed to sustain its December’s gains. Since the decision is already priced in, don’t expect a positive reaction anytime soon.

What Does It Take To Push Oil Higher

If we look at the daily chart, last December, when OPEC and Non-OPEC producers decided to cut the production, the prices have failed to remain at the year’s high.

During the past six months, every rally in both WTI and Brent Crude has been a failure, leading to a lower high pattern on most time frames.

Such a failure in every rally gives us a hint that if cutting the production did succeed in pushing the prices higher, then an extension is not going to do anything new.

What the price need is a deeper cut in production and not only an extension. The current price action clearly shows that an extension is unlikely to push the prices that much.

Another Leg Lower in Crude Oil?

For the time being, the downside pressure is likely to continue, especially as long as both WTI and Brent Crude continues to trade below the previous top, in order to continue with its current lower highs pattern.

However, don’t expect OPEC and Non-OPEC producers to watch the prices declines all the way back to this year’s lows.

OPEC and Non-OPEC producers are likely to be very active in the market through remarks and statements about their future plans. Don’t be surprised if they started to talk about deeper cuts in the future.

This is only if Crude Oil prices touch another low for this year.

Politics Views Involved

Trump is back to the US after a successful trip to the Middle East and Europe. However, there are no big decisions yet,  only some deals in the Middle East.

Meanwhile, the global geopolitical tension is here to stay, whether in the Middle East or between the US and North Korea. Moreover, the new geopolitical tension between the GCC countries and Qatar regarding the relationship with Iran is not going to support the current deal for a long time.

Therefore, if such tensions continue, expect some members to withdraw from December’s deal, to keep the pressure on  Crude prices. This would be another tool to put more pressure on Oil producers as long as possible.

If not a withdrawal, there will be tough negotiations if OPEC proposed a new deal for a deeper cut in output, which will likely take ages to be done, and unlikely to be reached this year.

From now until then, Crude Oil will remain the victim of such political situation.

Nour Eldeen Al-Hammoury

Nour Eldeen Al-Hammoury has more than ten years of experience in focusing on foreign exchange and global economic developments, as well as central bank policies and intermarket analysis (global markets relationships). Nour Eldeen is a regular on many major TV networks (several times each) such as: BBC Radio, BBC World News, Al-Jazeera, Al-Hurra TV CNBC Europe, CNBC Asia, CNBC Arabia, Al Arabiya, Bloomberg, Russia Today, Dubai TV, Sama Dubai, Skynews Arabia, Qatar TV and Future TV News.