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Oil plummets amid rising inventories and OPEC+ decision spooking investors

Published 05/06/2024, 08:37

US crude price is trying to reverse some of the losses on Wednesday morning after five days of continued selloff. West Texas Intermediate (WTI) dipped to a four-month low on Tuesday, finally finding some support at 72.6. Momentum had already been struggling when OPEC+ announced at the weekend it would start to gradually increase production later this year. Markets were sceptical about the decision given the market has already shown signs of weakness in demand. WTI dropped over 3.5% on Monday.

But more fuel was added to the bearish fire on Tuesday when inventory data showed a large buildup. The American Petroleum Institute (API) revealed that crude oil inventories in the United States rose by 4.052 million barrels for the week ending May 24. Markets were expecting a drop of 1.9 million barrels.

The reaction to the OPEC+ announcement may have been a little overextended. The decision comes at a time when traders are already nervous about the fact that interest rates remain so high still, and how that will affect economic growth in the future. A series of weak data readings in China have led to concerns about future demand, alongside how major economies in Europe and the US will fare in the future. The fact that markets have reacted this way may draw attention to the soundness of the global economy, and whether central banks have gone too far with their policy tightness.

The focus will be drawn to the ECB meeting this week and the Federal Reserve meeting next week to determine how much further markets will need to endure high interest rates. Markets remain highly confident that the ECB will cut rates by 25bps on Thursday. The US jobs data released on Friday will also be important for oil traders as it will affect the overall risk appetite and sentiment in global markets.

On the chart, WTI has become oversold in the short term, with the RSI bouncing off the 30 line as it attempts to find support to reverse higher. The bias remains bearish, but we may see some dip buying around current levels resetting some of the selloff. The fact that the price has dropped below the descending trendline support and remains below all four of its key moving averages suggests buyers are going to find continued resistance to move higher in the absence of a bullish catalyst.

US Crude (WTI) daily chart

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