What's behind the oil rally?

9 May, 2018

So... The oil market has been going crazy in the last few days. On Monday, the US West Texas Intermediate crude for June delivery rose nearly 1.5 percent to reach $70.73 per barrel on the New York Mercantile Exchange.

This has been its highest level since November 2014. And the funny thing about it? US crude production continues to grow steadily week after week. In fact, output levels are dangerously close to Russia - the world’s largest producer to date.

So… what everyone wants to know right now are the reasons behind the rally. And that’s not a single-factored movement, but instead a combination of four factors:

1- OPEC + Non/OPEC Output Cuts

Yes. The deal hasn’t changed much since it was first implemented back in 2017, but the 1.8-million-barrels-per-day cut has been doing well for itself. The agreement was renewed not long ago and it is expected to run until the end of this year.

According to a survey conducted by S&P Global Platts, OPEC’s production dropped in April to a one-year low with only 32 million barrels a day produced last month, down 140,000 barrels a day from the previous month.

2- Stronger Demand

And while supply continues to move down, demand is growing as never before. The International Energy Agency expects demand to reach 99.3 million barrels a day this year, up from 97.8 million barrels a day registered in the prior year.

3- Potential sanctions against Iran

Iran is a major producer of the Organization of the Petroleum Exporting Countries. Imposing new sanctions against it would immediately be reflected on further production cuts.

President Donald Trump said his decision on the Iran nuclear agreement will be announced today. Expectations are pointing at a pull out from the deal.

4- Venezuela crisis

Another report from S&P Global Platts said Venezuela output was at its weakest point in almost three decades. The economic crisis is not expected to improve any time soon and speculation continues to build up for an even worst scenario.

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