Posted on February 4, 2015 by the XM Investment Research Desk at 2:11 pm GMT
Oil prices rallied sharply on Tuesday to rise above $54 a barrel, peaking at $54.20, which is the highest level so far this year. Since hitting a 6-year low of $43.57 on January 29, prices are up more than 20%.
The question is whether oil prices are finally on the rebound after having declined for over 7 months, as prices dropped steeply from the June 2014 peak of $107.45.
Some analysts say the recent rally will weaken, given that there is still an oversupply of oil stockpiles in conjunction with tepid demand, as slowing global growth lowers manufacturing.
Weak data from China – a key oil consumer – has also darkened the outlook for oil demand and has consequently weighed on oil prices. Recently, data showed China’s services sector grew at the slowest pace in 6 months in January.
On Tuesday, oil stockpiles data for the United States showed the surplus is growing, so oil prices see no reason to get more expensive. In the US, oil production is at record highs and continues to grow despite recent, sharp reductions in the rig count that have been reported by oil service company Baker Hughes. Meanwhile, crude stocks at the Cushing, Oklahoma storage hub recently rose to a 12-month high. Also OPEC is not cutting oil production.
Later today at 10:30 Washington time, weekly EIA crude inventories will be released by the US Department of Energy.
Apart from the fundamentals, there are the technicals that are dragging on oil prices. There is an important resistance level and key psychological level at $55. When prices approach key resistance levels, traders tend to sell at or before this level is reached.
The overall outlook is for lower oil prices as the current supply surplus will overwhelm demand for the near term – at least for the next six months.
Having said that though, there are some analysts that say lower oil prices will spur economic growth, which will boost demand for commodities including oil.