By Barani Krishnan
Investing.com -- Oil and water do not mix, just like how common sense and bullish hype driven by OPEC don’t.
But so long as the world’s cartel of oil producers says it, the market appears to believe it.
That was the case on Thursday as crude prices gave back a little of their upward momentum after OPEC cautioned about demand for its oil — on the realization that a recession could hurt the market.
In a report released on Thursday, OPEC flagged downside risks to summer oil demand as part of the backdrop to output cuts announced this month by oil producers within the cartel. It said oil inventories looked more ample in the coming months and global growth faced a number of challenges.
While that made Thursday’s pullback logical in every way, it was hard to find credible reasons for oil’s near 5% rally in two days prior. That rally came despite a mixed weekly picture for U.S. oil demand and a moderately weaker dollar amid bets that the Federal Reserve might soon be done with its regime of rate hikes, which theoretically would be supportive for risk assets like oil.
More than anything else, the rally of the past two days was a result of bulls chasing the pipe dream that OPEC will deliver all or more of the 3.7 million barrels per day of output reduction it has promised since November — despite the cartel having a history of overhyping its production cuts and underdelivering on actual barrels.
“It looks like the rally in crude prices has finally hit a wall,” Ed Moya, analyst at online trading platform OANDA said in a prognosis on Thursday that could again be proven wrong by those clinging to OPEC’s promise.
“The oil market looks like it will remain tight but if this profit-taking selloff is gaining steam, prices could still have more to give as this rally started from the mid-$60s,” Moya added.
New York-traded West Texas Intermediate, or WTI, settled down $1.10, or 1.3%, at $82.16 a barrel. The U.S. crude benchmark had run up 2.1% the day prior and 2.2% on Tuesday.
WTI sank to a 15-month low of $64.12 in March before OPEC+ decided to boost the market with its announcement on April 2 that it will add 1.7 million barrels daily to earlier cuts of 2.0 million barrels per day it pledged in November.
OPEC+ groups the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent oil producers, including Russia. For the record, OPEC+ was still under-delivering on its original pledge from November, when it made the new undertaking this month.
Aside from WTI, London-traded Brent, the global benchmark for crude, settled down $1.24, or 1.4%, at $86.09 in Thursday’s session. Brent had jumped 3.7% in two prior sessions. It hit a 15-month low of $70.12 in March, prior to the OPEC announcement on April 2.