Oil price rally and the risk of a plunge

Oil prices have run up sharply, heading back towards the year’s highs. What could be driving this oil price rally and is it here to stay? 

21 August, AtoZForex –  Amid still high supply overhang, oil prices have been primarily driven by speculation. Speculation based on the expectation that the next meeting of the Organization of Petroleum Exporting Countries will lead to a deal to freeze output or support the weak prices.

Oil price rally and the risk of a plunge

This oil price rally may not end so nicely, considering the fact that if the OPEC meeting fails to result in the expected outcomes, the black gold may be in for another nosedive in prices. Back in April, oil prices rallied ahead of a meeting between OPEC and non-OPEC producers as it was highly anticipated that a deal would be reached to freeze output. But rather, the negotiation was stalled by requests from Saudi Arabia that Iran must be involved in the agreement. Even though Saudi has said it is now willing to reach a deal at the next meeting to support prices, its recent actions have not been so convincing as the country continues to produce oil at record levels.

Hence, some pessimism is warranted over any oil deal in the September meeting. The recent crude oil rally is built on a shaky foundation. Therefore, if the outcome of the September meeting is anything besides an actual deal to reduce the oil glut, we can expect prices to crash again. According to Thomas Pugh, a commodities economist at Capital Economics:

“The recent rally in oil prices has been primarily driven by speculation about a possible deal between OPEC and major non-OPEC producers to freeze production. As a result, we think that prices will fall back over the next few months as the outcome of next month’s unofficial meeting underwhelms market expectations,” Pugh wrote.

Crude oil Technical outlook

Brent weekly chart Brent weekly chart

Considering the current oil price rally, we expect a continuation of the strengthening ahead of the September OPEC meeting. The momentum could carry prices all the way up to $53 in coming days, which is the current high of the year. A break of this region could take prices all the way up to $65, which is the next major resistance.

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