Whether literally or figuratively one should not buy the premise of oil at its current price, of $34 per barrel for West Texas Intermediate Crude (WTI), up almost 6% this week alone. The volatility of the oil market in 2016, largely at the hand of OPEC, has decreased to levels which have not been seen since late 2003. However, recently with reports of an output freeze coming from some OPEC members, has shed some positive light on oil finally prompting investors to climb back on their horses. Here’s why you should be weary of this run-up in oil and be prepared for a possible pullback in the commodity in the short-term:
Iran Doesn’t Care
According to an exclusive interview with CNN, a senior Iranian oil official told the news source that the country would continue their plan to pump an additional one million barrels per day into the market. This excess would only add to the oversupplied market which should keep future oil prices down.
Production Freeze Doesn’t Mean a Production Cut
Reported by Bloomberg on February 16, 2016, the two leading producers of crude in the world, Saudi Arabia and Russia (along with Qatar and Venezuela), all agreed to freeze production. It is important to note the distinction between a freeze and a cut. The freeze means that those countries will continue to produce at record levels but will not ramp up production anymore. Having already oversupplied the market by doing this, this freeze is not beneficial
Chinese Demand for Oil
China is experiencing a change in times from what most of us have grown accustomed to over the past decade. According to the U.S. Energy Information Administration (EIA), China is the third-largest net importer of oil in the world, importing close to 4.50 million barrels of the oil per day. Shrinking manufacturing, more stimulus, and weak economic growth (the weakest in 25years according to the Wall Street Journal) will lend to less oil being consumed by this oil heavy importer.
What Has Changed in the Oil Market?
All of these factors still exist yet oil has increased by more than 20% to the level that it currently resides at! This price up from its low of $28.74 earlier in the year. With not much pullback along this upward trend, there will have to be a pullback in the short-term before reaching any new level (if there is such a level to be reached).
The market will always have its troughs and peaks and but this is a peak in which gains could be eliminated back to the low $30 range. Oil will continue to be volatile, however, it is important to note when the market becomes overbought. Without significant changes to the underlying asset, this price is more unjustifiable than not.