The price of West Texas Intermediate (WTI), the US crude oil benchmark, has continued its upward momentum, reaching around $63.25 during the early Asian trading hours on Wednesday.
This surge is primarily attributed to the easing of trade tensions between the United States and China, which has led to a more optimistic outlook on global economic growth, subsequently boosting investor sentiment in the crude oil market. The team at Vestronmix examines this topic from multiple angles in their article.
US-China Trade Deal: A Boost for WTI Prices
One of the key drivers of the recent rally in WTI prices is the breakthrough in trade negotiations between the US and China. Over the weekend, the two nations reached an agreement in Switzerland to significantly reduce tariff rates by a staggering 115%.
Specifically, the US President agreed to reduce the extra tariffs imposed on Chinese imports in April from 145% to 30%, while China announced it would slash duties on US imports from 125% to 10%. The tariffs are expected to remain in effect for 90 days.
This temporary tariff reduction has been seen as a positive step for global trade, potentially reducing tensions between the two largest petroleum consumers in the world. The lowering of tariffs signals a potential shift toward a more stable trade environment, prompting traders to adjust their expectations of a looming recession. As a result, there has been a renewed demand for crude oil, with WTI benefiting from the improved market sentiment.
Crude Oil Stockpiles: API Report Shows Surprise Build
However, not all the data supporting the price rally is entirely positive. According to the American Petroleum Institute (API) weekly report, US crude oil stockpiles for the week ending May 9 rose by 4.287 million barrels, contrary to market expectations of a 2.4 million barrel decline. This marks a significant increase in inventories, especially compared to the previous week’s 4.49 million barrel drawdown.
While higher stockpiles could normally be seen as a bearish signal for oil prices, the market seems to be focusing more on the broader economic factors, such as the trade agreement and the overall sentiment toward a global economic rebound. The unexpected build in US crude inventories has been somewhat overshadowed by the positive developments in trade talks and the potential for stronger demand in the coming months.
OPEC+ Supply Adjustments: Potential Limitations to WTI’s Upside
Despite the positive sentiment surrounding WTI, some factors could limit further gains in the price of crude oil. One of the major limiting factors is the supply side, particularly from OPEC+, the group of oil-producing nations that includes the Organization of the Petroleum Exporting Countries (OPEC) and its allies.
OPEC+ has already made plans to increase oil exports in May and June. OPEC has raised its oil output by more than previously expected since April, and the increase in production is expected to continue into May.
In total, OPEC’s output for May is projected to rise by approximately 411,000 barrels per day (bpd). This increased supply from OPEC+ could potentially put a cap on the upside for WTI prices, as more crude oil entering the market could weigh on prices, especially if demand growth does not match the rising supply.
Global Economic Outlook: WTI’s Short-Term Price Drivers
The short-term price outlook for WTI is heavily influenced by factors such as the US-China trade deal and global economic growth expectations. The tariff cuts between the two largest oil-consuming nations are likely to support crude oil demand by reducing trade frictions, making it easier for both nations to import and export goods, including energy products.
Additionally, as recession fears have been dialed back due to the trade progress, investor sentiment has improved, leading to higher demand for commodities, including crude oil. This shift in market sentiment has propelled WTI above the $63.00 mark, a key psychological level for traders.
Conclusion: WTI’s Price Outlook Amid Mixed Signals
The recent rally in WTI prices above $63.00 has been driven primarily by the easing of trade tensions between the US and China, which has helped to improve global economic sentiment. The tariff reductions are expected to support stronger crude oil demand, providing a bullish outlook for WTI in the short term.
However, there are several caveats to consider. The unexpected build in US crude stockpiles has added a bearish element to the market, although it has not dampened the overall positive sentiment. Additionally, OPEC+’s plans to increase oil output in the coming months could act as a limiting factor, putting pressure on prices as supply increases.
For now, WTI prices appear poised to stay above the $63.00 level, but the market will remain highly sensitive to any new developments, both on the supply and demand sides, which could impact the sustainability of the recent rally.
