What's Happening To Oil Prices?

Investors have been cautiously watching oil prices rise over the past week, wondering whether or not prices finally hit rock bottom and if this rally is sustainable. On Wednesday morning, crude prices suffered only marginal losses as traders took profits, but the commodity looked to be holding on to this week’s gains of roughly 19 percent.

How Did We Get Here?

The rebound in crude prices has been puzzling for analysts who say the market’s fundamentals haven’t changed enough to warrant a bounce. The rise has been largely based on news that oil companies are cutting back to cope with lower prices. US drilling activity has quieted over the past month and Asian firms like Cnook Ltd and Petronas have pledged to slash their spending this year to offset price declines. Other major producers are also rethinking their own spending habits, both Royal Dutch Shell PLC RDS and Conoco Phillips COP announced plans to cut down on investment and capital expenditure in their latest budgets.

Where Are We Going?

Most analysts caution that putting too much faith in the commodity’s recent rise is a mistake. Despite what looks like slowing production, the global supply glut will likely persist as most of the world’s biggest consumers are still struggling to regain their footing. Reports from the US Energy Information Administration and the American Petroleum Institute have shown that US stockpiles are gradually increasing, suggesting that supply continues to outweigh demand. Meanwhile, Gulf producers continued to up their output; a report from OPEC showed that the cartel’s January output rose to an average of 30.37 million barrels per day in January from 30.24 bpd in December. OPEC’s reluctance to cut back coupled with a slow-moving global economy has most expecting prices to face resistance in the coming days and settle lower.