Oil prices have surged to pre-Ukraine war levels, and the tide shows no signs of going down anytime soon. Join us as we unveil the driving forces of this lucrative trend!
What’s up with the Oil Prices?
In a stunning announcement, Saudi Arabia, the world’s leading oil exporter, has vowed to slash its daily production by an impressive 1 million barrels starting July. This strategic maneuver aims to counter the prevailing macroeconomic challenges that have dampened market spirits.
As a direct result of this groundbreaking decision, Brent crude futures soared, settling at $76.71 per barrel, with a thrilling surge to $78.73 during today's trading session. Similarly, U.S. West Texas Intermediate crude experienced a remarkable climb, reaching $72.15 after hitting an intraday high of $75.06.
The Saudi energy ministry revealed that July’s output would witness a drop to 9 million barrels per day, down from May’s 10 million barrels. This voluntary cut, Saudi Arabia’s most significant reduction in years, adds to the broader agreement within the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, to limit supply until 2024. The unified efforts of OPEC+ aim to bolster the ailing oil prices.
How did the OPEC June meeting actually go?
OPEC just wrapped up its 35th Ministerial Meeting on June 4, 2023. They’ve decided to make some adjustments to the overall crude oil production levels for both OPEC and non-OPEC Participating Countries in the Declaration of Cooperation (DoC). Starting from January 1, 2024, until December 31, 2024, the production level will be set at 40.46 mb/d.
This move aims to balance the oil market. Additionally, OPEC and its allies met for two days, beginning on June 3, 2023, to discuss potential further production cuts. While there were talks of cutting production by up to 1 million barrels per day, recent reports suggest that the alliance is unlikely to implement deeper supply cuts during their ministerial meeting on June 4, 2023.
OPEC stays optimistic about oil demand growth, forecasting that it will reach 2.33 million barrels per day (bpd).
Fatih Birol, the esteemed head of the International Energy Agency (IEA), emphasized that the likelihood of higher oil prices has surged following this groundbreaking OPEC+ deal.
Considering OPEC+ accounts for approximately 40% of global crude production and has already reduced its output target by an impressive 3.66 million barrels per day, equivalent to 3.6% of global demand, industry experts are eagerly assessing the true impact of Saudi Arabia’s production cut.
Phil Flynn, a respected analyst at Price Futures Group, remarks, “The market is still processing the implications of Saudi’s production cut, and the response is overwhelmingly bullish.”
SEB analyst Bjarne Schieldrop notes that the market’s reaction today remains somewhat restrained, given the previous cuts by OPEC+ failed to sustain price increases over the long term.
Renowned consultancy firm Rystad Energy predicts that the additional reduction from Saudi Arabia is set to deepen the market deficit to an astonishing 3 million barrels per day in July, potentially catapulting prices even higher in the weeks to come.
5 Reasons why Oil Prices will continue to Rise!
Oil prices are on the rise, reaching levels similar to those witnessed during the early stages of the Ukraine war. Here’s why some analysts believe these high oil prices are here to stay.
- Global economic growth: The price of oil is viewed through the lens of future global economic growth. Higher prices can signal investor belief that consumers will spend more while falling prices demonstrate a conviction that demand will reduce.
- Geopolitical tensions: Oil markets are particularly sensitive to geopolitical tensions. If the political and security situation in major oil producers like Kazakhstan and Libya worsens, then oil prices could quickly head northwards.
- Supply and demand: One reason crude oil prices can be volatile is that supply and demand are relatively inelastic, meaning they’re slow to respond to price signals. Economic growth can drive up the demand for crude oil, while slowdowns tend to lower demand and prices.
- Investor speculation: Many hedge funds and other large investors are patiently awaiting a much bigger prize—for oil prices to rise further so they can exercise their call options in full and enjoy the right to.
- OPEC+ production plans: Crude oil prices react to many variables, including supply and demand prospects and the perceived risk of market disruptions. OPEC+ is an international alliance of crude oil exporters that negotiates export quotas for members in an attempt to influence global supply.
How can traders benefit from oil price fluctuations?
Traders can profit from fluctuations in oil prices just like they do from changes in stock prices. Here are some ways to profit from oil price volatility:
- Use derivatives: Traders can use derivatives to gain leveraged exposure to the underlying asset without currently owning or needing to own the asset itself.
- Monitor supply, demand, and sentiment: Supply, demand, and sentiment toward oil futures contracts play a dominant role in price determination.
- Use a trading strategy: Traders can use a trading strategy to profit from oil price fluctuations. For example, a strategy that involves buying a call option with an at-the-money strike price when oil volatility is high can be profitable if the price of oil moves beyond a certain level.
- Mitigate risk: Traders can mitigate risk by using stop-losses and limit-close orders to close trades at predetermined levels of loss and profit, respectively.
- Close-out trades before expiry or rollover contracts: Traders who just want to speculate on the crude oil price without getting involved in the delivery can close out their trades before the expiry or roll over their contracts.
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Best Trading Instruments closely associated with oil prices!
There are several trading instruments that are closely associated with oil prices.
Here are some of the best trading instruments based on the search results:
- Forex Instruments: Foreign currency exchange markets run 24/5 and forex instruments fit perfectly for short-term day trading as they offer high volatility, large liquidity, low capital requirements, and low transactional costs. Understand the Currency and Commodity Correlations in detail!
- US Crude Oil (XTI/USD.ax): The XTIUSD.ax ETF mirrors the S&P GSCI Crude Oil Index’s performance, enabling investors to access crude oil without the need for physical oil handling. Investing in XTIUSD.ax offers exposure to crude oil while also providing diversification as it is uncorrelated with other asset classes.
- UK Brent Oil (XBR/USD.ax): UK Brent Oil (XBRUSD.ax) is a type of crude oil that is produced in the North Sea. It is a benchmark for the price of oil in the global market. The XBRUSD.ax contract is for the delivery of 1,000 barrels of UK Brent Oil. The contract is settled in US dollars.
- Natural Gas (XNG/USD.ax): XNGUSD.ax is an exchange-traded commodity (ETC) that mirrors natural gas prices. It tracks natural gas contracts on NYMEX and is rebalanced daily. It offers exposure to natural gas prices without owning the commodity and helps hedge against rising prices.
- Oil Company Stocks: Investing in oil companies can provide a highly liquid asset class with which to trade several strategies. These stocks are directly affected by the price of oil, as they produce, refine, or transport oil and gas. Some of the largest energy companies in the US include Exxon Mobil, Chevron, and ConocoPhillips.
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