Crude oil prices again forecast to rise
Bullish factors in the oil market were on display last week as supplies became a growing concern, though demand may be determined by what happens next in the world’s leading economies, analysts said.
Both the International Energy Agency and the Organization of the Petroleum Exporting Countries increased their demand estimates in their monthly market reports last week. Those forecasts came amid pledges from Saudi Arabia and Russia to trim production by a collective 1.5 million barrels come August, tilting the scales toward a tighter market.
Elsewhere, the United Nations pleaded for calm in OPEC member Libya, where armed militias are protesting the kidnapping of a former prime minister. Production from the Sharara and El Feel oil fields was curtailed as a result of the fighting. Combined, that puts more than 300,000 barrels of oil per day in jeopardy.
RBC Capital Markets said in a research note Friday that “Libya represents the biggest nearterm oil supply risk.”
Holding in the upper-$60 per barrel range since April, West Texas Intermediate, the U.S. benchmark for the price of oil, broke through the $75 mark last week after jumping some 8 percent, or $7 per barrel, since the start of July.
“I think we have a real shot to get to $80 per barrel,” said Phil Flynn, a senior energy analyst at The PRICE Futures Group in Chicago.
From his view, Flynn said the main driver since the beginning of July has been the bullish narratives, particularly with the IEA forecasting record oil demand this year. Even with the lingering headwinds from inflation, he does not see a major slump in demand emerging.
And with supplies at a premium, oil prices will have no place to go but upward as a result.
Should the Energy Department surprise on the upside with a production forecast in the monthly drilling report, however, it could offset some of the supply-side concerns. Total U.S. crude oil production is around 12.5 million bpd, some 2.3 million bpd more than Saudi Arabia, and much of that is coming from here in Texas.
Giovanni Staunovo, a commodities strategist at Swiss investment bank UBS, said investors may be in a believe-it-whenthey-see-it mode on supplies, so OPEC and Russian exports are something to watch, particularly given the sanctions-busting on Russian barrels.
”If the oil market is undersupplied as we all think, we should start to see at some point sharply lower inventories, which should further lift prices in my view,” he said.
On some of the broader economic issues that may influence crude oil demand, there’s no shortage of data coming out of the U.S. economy this week. Last week saw core inflation dip below 5 percnt annually to June, while wholesale prices increased by only 0.1 percent last month, the slowest pace in nearly three years.
This week, data on everything from housing starts to retail sales and industrial production are on tap, which will help those trying to read the tea leaves on the Federal Reserve’s next rate move.
Many of those data could be lower than prior months, leading to the perception the Fed may stand pat on rate levels. But commentary last week on consumer-level inflation suggested that a few data points are not indicative of the entire picture.
“The U.S. economy is in a much better shape than other developed countries, they will start reducing rates earlier than the rest, demand for dollars therefore will decline relative to the euro, sterling and Yen and, as we all know, a weak dollar is demand supportive,” said Tamas Varga, an analyst at the London oil broker PVM. This week should provide a nice set up for Fed meetings starting July 26.