The increased tensions reported from Syria and Yemen makes this new context - and source of volatility - even more obvious. The weapon path that directly opposes the United States and Russia - two of the world’s biggest oil producers - worries the market players. As a result, the price of the Brent has reached levels that haven’t been seen in three years, at around 73-74 USD per barrel.

Apart from the geopolitical rumblings, the fundamental data remain mixed, adding an extra source of uncertainty to a market that is already under pressure. The International Energy Agency (IEA) has nevertheless kept its projections for the oil demand in 2018 the same. The institute remains confident about the ability of the market to rebalance itself and even reveals that the member countries of the OECD could reach their 5-year average as soon as May. However, let’s note that these projections could considerably worsen in case of a Chinese-American trade war, in which the agency sees a factor of major uncertainty.  

In their monthly report, both the OPEC and the U.S. Energy Information Administration (EIA) have conjointly revised their projections for the American production upwards. The number of drilling sites in operation keeps increasing, even more so since the companies are incentivized to produce more as the oil price goes up. It’s good to keep in mind that the room to maneuver in their production behavior is considerably bigger for shale oil producers than for conventional oil producers. It’s also important to acknowledge that this advantage inspires other countries, like Australia, to do the same: the country has plans to considerably increase its shale oil production.

When it comes to oil production, the OPEC is happy to see that the production of its cartel members is going down following the production quota it has put into place. An important part of this decrease, however, is due to the situation in Venezuela, where the production has crumbled as a result of the financial and economic crisis the country faces. And then there is a final subtlety that the market players have quickly moved on from, the statement of the Iranian oil minister in which he says he would be in favor of a price of 60 USD per barrel. This could lead to future disagreements in the cartel during their next meeting on the 22nd of June when they’ll decide whether or not to continue with the production restrictions.

Graphically speaking, and in week units, the price of the Brent has moved out of the consolidation zone between 62 and 70 USD (see the chart on the right). The primary upward trend has thus reclaimed its rights with the symbolic threshold of 80 USD as its target. Buyers are definitely keeping a close eye on this, following the climb of the weekly moving averages. This is why only a return below the 70 USD could signify a pause in the short-term.

Translated from and inspired by the original article.