Like most other commodities in the markets right now, oil has seen itself go through a strong recovery since the end of 2018. Currently, U.S. crude-oil futures posted their highest close in over three months.
International benchmark Brent crude was trading at $67.40 per barrel, a 1.5 percent gain over the course of the week from Monday’s start at $66.39 per barrel. American benchmark West Texas Intermediate increased further, gaining 1.9 percent throughout the week from $56.33 per barrel to $57.41 per barrel. For both benchmarks, these prices are at the highest levels since November 16th, 2018.
This has been due to a variety of different geopolitical reasons. For one, the Fed choosing to postpone hiking up interest rates is undoubtedly a driving force, as well one of the more recent developments to mention. The central bank raised interest rates four times in 2018. However, the announcement to be “patient” has pushed the American dollar lower against other currencies.
Another recent development that has caused commodities prices to rise is the stronger sense of hopefulness that U.S.-China trade talks will conclude with an agreement. Even if tariffs between the two countries don’t directly impact oil prices, prices will change to accommodate the changing international economic landscape. As the nation’s leaders meet again today in Washington to further discuss a trade deal, investors are keeping close tabs on the results of the conversation.
“Oil prices, as well as the stock market have been rising on the anticipation that China and the U.S. would agree to a trade deal,” added Andy Lipow, president of Lipow Oil Associates in Houston. “In addition, we’re seeing a tightening of oil supplies around the world resulting from OPEC and non-OPEC production cuts.”
But the largest factor contributing to the rise of oil prices over the past few months has been the decision from OPEC and ally countries to cut production in order to stimulate prices. Ten partner producers outside of the OPEC, led by Russia, agreed in December to collectively reduce crude output by 1.2 million barrels a day for the first half of 2019. Since then, oil prices have increased close to 30 percent since the decision was made.
“While Saudi Arabia willingly cuts output and exports, the U.S. producers continue to flood the market with shale oil,” said Carsten Menke, commodities analyst at Julius Baer. “Drilling activity has stabilized, which brings much-needed cooling to the recent shale boom frenzy. Yet U.S. oil production remains on track to reach 13 million barrels per day by the end of the year. Balancing the market, i.e. aligning the somewhat uncertain global demand growth and the somewhat erratic U.S. sanction policies towards Iran and Venezuela with the shale boom, rests on Saudi Arabia and its allies.”
While in the short-term oil prices are expected to continue rising, this will likely be counterbalanced by the U.S.’s growing energy independence. U.S. energy companies have also been opening more offshore oil rigs over the past few weeks. With the country’s rising crude oil and shale output, this could threatening to put global oil markets into a downward price spiral as the energy market struggles with an oversupply of energy.