Market Fearing a New Oil Price Collapse07.07.2021by Michalis Efthymiou
Bulls over the last 12 months in the oil market have been benefiting as oil has been increasing by over 70%. Oil is known to be extremely volatile when being compared to currency exchanges and stocks, but even for oil’s standards an increase of over 70% is viewed as significant and unique.
However, this week we have seen prices collapse at pace. Over the period of three days the price of Brent Crude Oil decline by 7.43%. The price movement this morning has formed a bullish retracement but has not yet corrected. The price currently stands at $74.35, $3.22 or 4.24% lower than this week’s price high. So why has the price declined this week?
Oil is largely determined based on the supply of barrels within the market and the demand. A collapse in 2020 which caused oil prices to drop below $10 was caused by an oversupply as well as almost zero demand due to the Covid-19 crisis. The market monitors OPEC in order to ensure they are up to date with the amount of supply and estimated demand. OPEC countries provide over 40% of the world’s oil.
External factors continue to be positive for the asset. The refusal to increase production by the participants in the OPEC+ deal according to experts could create a significant oil deficit in the market as early as in August.
At the same time, American shale oil producers, which previously partially compensated for the lack of supply but are in no hurry to expand production which requires additional financial investments due to the continuation of the coronavirus crisis. On the other hand, investors are frightened by the uncertainty surrounding the increase in oil supplies to the market by the participants in the OPEC+ deal.
Currently, Saudi Arabia and the United Arab Emirates, with the help from Russia, are trying to reach a compromise but so far have fallen far short.
Some may ask, what happens if they do not reach an agreement? A lack of an agreement or compromise on behalf of the other OPEC countries may push the UAE to withdraw from the OPEC+ agreement, which will most likely lead to the increase in noticeable supply volumes on the market and pressure on prices.
It is important to note that a possible deal or change in demand caused by economic restrictions or lockdowns can cause further price volatility.
The nuclear deal between Iran, the EU, and the US has not yet been concluded, and Iran cannot bring its own additional volumes of energy to the market. The price effects of a deal cannot be known for certain but generally it will lower uncertainty and friction between two of the most influential regions for Oil.
The prices are supported by the data of the API report, according to which oil reserves in the United States fell by 7.983 million barrels, which is more than the market expected reduction of 3.925 million. The API is known as a major indicator for both Crude and Brent Oil as the higher the supply in the market the more strain there is on oil prices unless there is also an increase in global demand.
The main focus now will remain on the outcome of the current negotiations between OPEC member states and in general the developments surrounding Coronavirus. This month so far, these two elements has been the main drive for prices and the markets will continue to evaluate accordingly.
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