Forex Trading Library

Oil Is Back To Reality: WTI and Brent Crash By 5%

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Since the beginning of this year, we have been watching Crude Oil prices very closely, especially after OPEC announced cutting the production in coordination with Non-OPEC members.

OPEC decided to cut its production back to the 32M barrel, and they actually achieved that level in January and February of this year, down from a record of 34.38M barrels in November of last year.

However, the whole deal is priced in for a long time. We all knew that they will reach a deal at some point of last year, but we didn’t know the details. However, this does not matter.

Priced In?

This is not something new; the markets are always pricing in the significant events in advance. This is not rocket science. Whether if its OPEC decisions, central banks or even political events.

Politicians remarks in addition to central banks chiefs are one of the tools to move the markets, and this is exactly what happened to Oil over the past year.

Looking a little bit at the history, in January of last year, when Crude prices were at significantly low levels, Saudi Arabia announced that Oil producers will meet in Doha – Qatar to discuss the possibility to freeze Production.

Since then, we haven’t seen the prices at that low levels ever again, since that announcement, Crude priced advanced more than 100%, as every day, one of the ministers would send out remarks that they are making progress to reach a deal.

They met more than 5 times, but without reaching a deal, even in June, which was supposed to be the meeting where they announce the decision. However, they surprised the market with no deal. Instead, they kept the hopes higher for a possible deal soon.

They kept on saying soon for 12 months until December when they announced a coordinated decision between OPEC and Non-OPEC producers to cut the production.

Cut Not Freeze

The market was looking for a freeze, while OPEC announced a cut in production, you would probably say that this is positive. This is true, if you look at the chart, Crude Oil soared in November and December.

So the Freeze concept is already priced in and even the cut is priced in at the end of last year.

Stabilization ?

Well looking at the chart since the beginning of the year, we can see the tight range the prices were trading within, below key resistances.

WTI Crude Oil key resistance was at 53.92, and Brent Crude remains at 56.80. There were many attempts to break above those levels, but without any chance. However, it seems that the stabilization has come to an end

Today’s Crash

Yesterday, the US Crude Oil inventories posted the longest weekly surplus state since two years, and the total inventories have reached a record, which is seen as a significant sign of higher production.

In return, WTI and Brent Crude lost almost 5%, while they managed to ease theirs loses in Asia, rising by 1%. However, during the European session today, the prices crashed by more than 3%

Catalyst is Needed

Today’s decline comes after a notable failure to break higher after consolidating near the highest level of this year, but the catalyst of the decline was the inventories.

Moreover, OPEC noted that they are worried about the prices reaction recently. In the meantime, since the deal is priced in while the inventories are rising, Crude Oil needs new catalysts, such as growth expectations and other fundamentals. Otherwise, today’s decline might be the beginning of a longer trend, which may last for weeks if not months.

Don’t be surprised if you start to hear some of OPEC members commenting about the prices and/or to raise hopes for an extension of the current deal which expires in June as an attempt to stop the current decline.

 

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