OPEC agrees to the cuts and yet the price is going down. Why?
|OPEC extended the production cut so why we are see the price tumbling? As Alpari Research and Analysis we say that for quite a long time. Cuts won't help much and cannot strongly influence the price of the OIL. In addition to that, we are just witnessing typical market mechanics, which we will describe further on.
Extension of the cut in the oil output was expected for a long time. Traders used that reason to but Oil and because of that, the price climbed sharply in the first half of May. When the rumour becomes a truth, you sell - that what usually happens. That is why traders often repeat: buy the rumours and sell the facts. Current situation on the Oil is just another example of this old school quote.
Second thing is the cut itself. We said that before and we will repeat that again. If some countries cut the output, other will increase it in order to close the gap and gain market shares. Shale producers, non-OPEC countries, they all are happy with the cuts as it helps their business and the overall supply-demand situation stays the same.
Last but not least we have a bearish technical situation here. Price did not manage to break the resistance on the 52 USD/oz (WTI) and broke the lower line of the flag (blue lines), which is a strong negative signal. Bearish reaction followed, driven by the convergence of the fundamental and technical factors. The beginning of the new week just proves my point, we are going down. Buyers do not even have enough strength to test the lower line of the flag as a closest resistance.
So what are the perspectives? Not very bright. When we look at the indexes we can see that we are in times of the prosperity and yet the demand for the Oil is low. I do not see a reason why this demand should increase in next few years especially when we should see a global recession/correction at some point this or the next year.
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