Crude Futures Rally, But Expectations May Wane

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Initial Success From OPEC Cuts

Crude oil futures have performed valiantly in the recent market, gaining almost 2 percent year over year. OPEC production cuts have succeeded in their mission to raise crude oil prices, but this does not necessarily mean that prices will stay here.

Representatives from S&P Global Platts seem to think that the current wave of price increases for crude oil may not last. Although the price is up in the short term, OPEC crude output has almost returned to its average over the past five years. If the basic forces of supply and demand take their course, production cannot undergird higher crude oil prices on their own.

Expectations Regress to the Mean

The global benchmark for crude is currently at a three-year high at $74.06 per barrel. West Texas International was trading slightly lower than that at $68.40 per barrel. However, the only real metric that is keeping prices as high as they have been are the short term production cuts and political tensions in key oil producing regions.

External Market Factors

Unexpected production cuts in oil from Venezuela also played a role in the rise in futures. This is a dynamic that will definitely not continue moving forward, as production is expected to rise back to normal levels in the country very soon.

Crude oil futures denominated in the yuan will also help oil trade on the spot market. As the yuan becomes a more widely accepted global currency, this will also bring down the price of oil.

Additional factors driving speculation for lower prices include the easing of the conflict in Syria, Iran’s interest in yuan-denominated crude, and an upward trend in production from Papua New Guinea.

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