28.05.202012:16 Forex Analysis & Reviews: Oil collapsed due to excessive reserves

The oil market welcomed the day with a fall. Crude oil prices plummeted immediately after news came with an unexpectedly high increase in stocks in the United States of America. The situation was fueled by information that Russia is planning to increase its production in the middle of the summer of this year.

This morning on the London Stock Exchange, the price of futures for Brent crude oil for July delivery fell by 1.73%, or $ 0.6, which sent it to a level of $ 34.14 per barrel. Recall that according to the results of yesterday's trading, its value also decreased and the decline in the environment amounted to 3.95%, or 1.43 dollars.

Meanwhile, the WTI black gold futures for July delivery on the New York Stock Exchange also went down the line. So far, the reduction amounted to 3.2%, or 1.05 dollars, which forced the raw materials to move to the level of 31.76 dollars per barrel. Yesterday, at the closing of trading, a drop in value was also recorded which is about 4.48%, or $ 1.54.

According to some experts, the overestimated cost of crude oil is an opportunity to stop the policy of reducing oil production, which is so actively pursued today. At least, this will be a signal to slow down the whole process. Naturally, for the market, this can become an extremely negative sign since the danger of a possible new outbreak of the COVID-19 pandemic still remains.

According to the news, the reserves of crude oil in the United States of America increased dramatically, which was contrary to earlier forecasts, and thus, fueled the already tragic situation. According to statistics provided by the API yesterday, crude inventories increased by 8.7 million barrels, gasoline inventories increased by 1.1 million barrels, and distillates added 6.9 million barrels. However, there is also a spoonful of honey in this tar barrel as the reserves of black gold in Cushing, on the contrary, decreased by 3.4 million barrels.

One way or another, analysts were not ready for such a turn of events, because it was only at that moment they said that reserves should be reduced by at least 1.2 million barrels.

If you look at the statistics for the last five years, then over this time in the same period a reduction in oil reserves has traditionally been recorded. The exception was only 2019 when there was a slight rise. The current increase was a complete surprise for experts and the market.

At the moment, there is nothing left but to wait for the official report of the Ministry of Energy of the country, which should be released in the evening today. However, after such a crushing forecast by the American Petroleum Institute, it is difficult to assess the real situation.

In the meantime, experts from Moody's have adjusted their rating on the downward trend of the oil. According to them, the medium-term forecast for the price will be from the region of $ 45 to $ 65 per barrel, whereas previously it was assumed that the price of oil will range from $ 50 to $ 70 per barrel.

Another important negative factor was the announcement that Russia could terminate the OPEC agreement in the near future, which implies a decrease in raw material production in order to reduce overall reserves and restore market demand. At the very beginning of the signing of this contract, OPEC members managed to support oil quotes, but now with the growing tension in the world and the appearance of by no means happy statistics, this work has almost ceased to be felt. In addition, the Russian side was very skeptical of this venture at the beginning and still continues to express deep doubts pushing it to withdraw from the treaty. If this eventually happens, the coalition will lose one of its central partners and will be very limited in its actions in the future.

Recall that the agreement between OPEC members was signed on May 1 of this year. According to it, member states commit themselves to reduce oil production by 9.7 million barrels per day for two months from the date of ratification of the document. Saudi Arabia and Russia have committed to reducing production by 2.5 million barrels per day from their baseline figures, which are in the region of 11 million barrels per day. This agreement was to be valid for two years, but now, it seems that a turning point may come if Russia finally decides to withdraw from it. All this, however, is fully justified, because, on the eve of the meeting of the OPEC members, Russian obligations have traditionally been in the spotlight and put pressure on the market.

Thus, during this morning, a situation has developed on trading floors where it becomes more profitable to sell, since macroeconomic indicators do not inspire much confidence and do not provide the proper level of support.