Oil in danger of sharp reversal

1 March, 2017

The price of oil has pulled back today after a Jump in US oil inventories which analysts say offset any production cuts from OPEC.

Ever since oil broke through the $50 mark, US producers have been increasing production in order to take advantage of higher prices with some predicting this may lead to an oversupply and a subsequent drop in prices.

"Though the rate of efficiency gains in U.S. shale oil drilling will slow as time progresses, we still expect total production to expand as the number of rigs increase. This will weigh on prices," said Capital Economics analyst Caroline Bain.

Another factor that may hurt the oil price, is the number of long speculative contracts held by investors at the moment, who believe the price is headed higher but may opt out should things turn sour,

"Increasingly, the high degree of speculative interest is hanging over oil prices like the sword of Damocles. If financial investors were to unwind their positions, a sharp fall in prices would be on the cards," Commerzbank said in a note to clients.

Analysts at PVM also believe a dangerous situation for investors is at play,

"The guessing game is in full swing as which direction oil prices will break out of their current range. It is fair to say the voice of those who are expecting higher prices in the coming months is louder than that of their rivals," PVM said, but warning that "if current longs decide to run for the exit, there will only be one way for oil prices to go". They noted.


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