In line with the US stock market performance, the price of oil bottomed on December 26th, 2018, and since then it managed to recover by almost 50%, with no sign of weakness showing thus far on the West Texas Oil (WTI).
Sanctions on Iran back in place
About a year ago, the US decided to get out of the Iran Deal, and put sanctions again on the country, as Donald Trump claimed: “it was the worst deal ever made”. Despite all the sanctions put back into place, Iran had not thus far shown any sign it is willing to get to the negotiations table with the US.
As a result, the country is struggling to sell its oil and is peddling a million barrels of oil, according to a recent Bloomberg article. Since traders are able to invest in oil with instruments like FXVC oil CFDs, the price had been steadily climbing from $42 per barrel to $63 dollars per barrel.
Blocking Iran’s oil was a weird move from the US President, considering that he was advocating for lower oil prices. By imposing sanctions on Iran’s oil he reduced the global supply, which had pushed prices higher. Stronger ties with Saudi Arabia seem to be behind the decision, as Iran is its most important competitor in the Middle East.
OPEC extends cuts
The second significant reason why the WTI price went up has to do with OPEC’s and Russia’s decision to extend the daily production cut until June 2019. The consortium widely-known as OPEC+ agreed on a cut of 1.2 million barrels per day, a move following an announcement that some Iranian oil importers will be exempted from the US sanctions. Japan, China, Turkey, India,
With oil approaching fast the $40 level, the only choice for OPEC was to cut production and they move had managed to stabilize the market at much higher levels. So far, the US had increased its inventories in order to counteract OPEC’s move and in order to gain more market share.
It will be interesting to see whether the US President will take further measures to reduce the upside in the oil price. Also, it will be important to watch how the global economy will perform throughout the year. A better-than-expected performance will further support oil, while on the other hand, signs of an economic contraction will begin to weigh heavily.