The oil market has experienced some turbulent days recently. This was particularly evident last Wednesday when oil prices plummeted by over 5% following the U.S. Department of Energy’s report of a significant rise in oil inventory levels. By the end of the week, the price had fallen more than 6%, leaving Brent crude, the benchmark for European markets, at $83.8 per barrel, and West Texas Intermediate, the standard for the U.S., in the $78-$79 range. These declines are pushing crude oil prices to the edge of a technical abyss. The fall below $80 for West Texas Intermediate has broken a psychological support level, possibly leading to further declines as it enters a correction phase. This prompts a critical question: Why is the oil price correcting?
Last week’s 6% drop in Brent crude prices can be partially attributed to eased concerns over potential supply disruptions due to escalating hostilities in the Middle East. “The geopolitical dynamics in this region will continue to be a focal point in the oil markets for the next couple of months,” according to Capital Economics. Just as Middle East tensions previously drove oil prices up when a full-scale war between Israel and Iran seemed imminent, the recent relaxation of these tensions is now exerting the opposite effect.
Clearly, the oil prices have been under pressure in recent weeks. “It appears that political events in the Middle East are dictating short-term trends,” noted Carsten Fritsch and Barbara Lambrecht, economists at Commerzbank, also referring to the reduction in tension between Israel and Iran. However, focusing solely on geopolitical risks to analyze oil is a mistake. There are fundamental market indicators that also provide insights, while technical analysis suggests that oil is teetering on a dangerous edge. This level could act as support to prevent further drops, but any new push—such as additional data showing increased inventory levels or another bearish factor for crude—could cause sharp price declines.
Inventory levels are not helping either. According to the Energy Information Administration in the United States, crude oil inventories surged last week. Excluding the Strategic Petroleum Reserve, commercial crude inventories increased by 7.3 million barrels to 460.9 million barrels for the week ending April 26. This was contrary to analysts surveyed by The Wall Street Journal, who had forecasted a decrease of 1.5 million barrels in crude inventories. Rising oil reserves typically signal potential further drops in crude prices: the more oil accumulated in storage tanks, the less need to extract oil in the coming weeks for gasoline and diesel production…
Just over a week ago, commodity research center BloombergNEF reported that, given the current level of crude inventories in advanced countries, oil prices should be about $25 below current levels. However, the risk premium generated by wars and tensions in the Middle East continues to keep oil prices somewhat ‘inflated.’ This aligns with how crude prices have evolved as tensions between Israel and Iran have eased.