Oil prices drop even as OPEC extends output cuts

Oil prices remained strong in early trading on Monday, with WTI price testing the $80.0 per barrel level resistance but dropping below the $78.8 per barrel level later in the day. If WTI price declines, it may encounter support near $76.0 per barrel, while further resistance may be found near $85.0 per barrel.

Oil prices were propelled upwards last week by reports that OPEC+ is considering extending its voluntary output cuts throughout the year. The organization is enforcing substantial production cuts to keep oil prices high. OPEC+ announced on Monday its decision to keep its oil output policy unchanged, maintaining the voluntary production cuts that have already been in place through the second quarter of 2024. Russia announced additional cuts of 471K barrels per day as a result of lower refinery runs due to Ukrainian drone strikes. 

Even though OPEC’s output cuts will limit oil supply, the organization’s decision did not come as a surprise and had already been priced in by markets. Some investors were anticipating even higher production cuts, which were not realized, driving oil prices down after the organization’s announcement on Monday. 

Raging tensions in the Middle East boost oil prices. Supply concerns provide support for oil prices, as the crisis in the Gaza area threatens to disrupt oil distribution. Tensions around the Red Sea area have been rising, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution. Iran-backed Houthi militants are attacking commercial vessels in the Red Sea, raising concerns about oil supply. 

China’s poor economic outlook is increasing concerns of reduced oil demand, putting a lid on oil prices, despite increasing geopolitical risks. Weak economic growth in China raises concerns about future demand, pushing oil prices down. 

Oil prices are also kept in check by a strong US dollar and high-interest rates. The Fed kept interest rates unchanged at its latest policy meeting in January, within a target range of 5.25% to 5.50. 

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Written by:
Myrsini Giannouli

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