Heading into the second half of the year, crude oil prices could continue to drift higher, following the trend seen much of this year.
Strong consumer demand both in the U.S. and abroad, the end of the global supply glut caused by overproduction from both U.S. shale producers and members of the Organization of Petroleum Exporting Countries, supply bottlenecks in the U.S. and reduced capacity by some OPEC members are lifting crude-oil prices, with some oil analysts upgrading their views for prices.
No doubt you’ve seen higher prices at the pump. According to AAA, the nationwide price for a gallon of regular gasoline is $2.89 as of June 19. A year ago you could fill a gallon for $2.29. Citing Energy Information Administration data from the Department of Energy, AAA says for the week ending on June 8, the consumer gasoline demand rate was the highest weekly estimate on record since the EIA began tracking it.
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Demand drives prices. Energy analysts say the sharp consumer demand is really the unsung story about the momentum behind oil prices.
“Global oil demand is really a lot more robust than people kind of gave it credit for,” says Shawn Reynolds, portfolio manager, natural resources equity strategy at VanEck.
Even when the global economic growth was fairly anemic in recent years consumer demand for oil was strong.
Demand has been above historic norms for a few years now, as users responded to the fall in oil prices and haven’t been spooked by prices gradually rising. According to Kelley Blue Book, in 2017, four out of the top five automobiles sold in the U.S. were trucks or sport-utility vehicles, which usually consume more gasoline than cars.
The summer driving season is ahead, and that’s normally a strong time for gasoline demand, says Mark Watkins, regional investment manager at U.S. Bank Wealth Management in Park City, Utah, so the demand trend could continue.
With West Texas Intermediate crude oil prices hovering around $67 a barrel now, current prices are in a bit of a sweet spot for everyone.
“The $60-range is still beneficial for the consumer and it’s still beneficial for the producer,” Watkins says. “Once WTI pushes into the higher 70s and 80s, then you start to put a little bit more of a burden on the consumer because more of their monies go into the cost of oil and that’s just a tax to them.”
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He says if prices start to reach to the $80s on WTI, it could start to crimp demand.
Price outlook. Reynolds expects oil prices to rise as markets head into the second half of the year and has upped his forecasts. He says at the beginning of the year, he was hopeful at best that prices would be in the $50 to $55 a barrel on average.
“That was the number a lot of people were running through budgets and models and whatnot,” he says. “And now I think you could very comfortably say you’re going to average somewhere around $65 or even higher for the year.”
In addition to the strong demand, he says the possibility of lower supply works to support prices.
There’s an Organization of Petroleum Exporting Countries meeting Friday, and market participants expect OPEC members will lift the production cap they instituted 18 months ago to help mop up all the excess supply. To the surprise of nearly everyone, OPEC members not only stuck to the production cap but actually pumped less.
Recently Saudi Arabia, the largest OPEC member, and Russia, the biggest non-OPEC member but which also agreed to the caps, have started to contribute a little more oil to the world markets, and that’s helped prices come off their recent 3½ year highs set in May. Reynolds says even if producers relax the limits, it doesn’t take into account problems with other members like Venezuela, which used to be a significant global producer. Other members like Angola, Algeria and Mexico are seeing reductions in output.
Michael Cohen, director of energy markets research at Barclays, says the scuttling of the Iran nuclear deal is likely to be a topic of debate at the next OPEC, but it’s unclear how it might change the country’s output. The Trump administration hasn’t said how it will enforce the sanctions and might not do so until the wind-down period ends later this year.
“Estimates of the potential impact of sanctions on Iran range from 300,000 barrels a day to up to 1 million barrels a day,” Cohen says. “We believe it could be toward the lower end.”
Watkins’ outlook this year was for prices to slowly drift higher to the $60s area, and now he says prices could average around $65 to $70, although there could be some price swings depending on news headlines.
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“It may not feel like it because of all the volatility, but when you start to look at trend lines, we’re going to continue to have a gradual move up because of the improvement in the fundamentals of oil,” he says.
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Oil Investors See Momentum originally appeared on usnews.com
