Crude oil capped off its most impressive rally in years, as the markets responded positively to signs of increasing global demand and the bearish reversal of the US dollar. However, there is no shortage of market analysts reminding us of the dangers associated with investing in oil, including a worsening supply glut, waning international demand and a rising US dollar. The key question is, what’s next for crude oil?
Brent crude and its US counterpart, West Texas Intermediate, both reached 2015 peaks this week. Brent for June delivery eased off its 2015 highs on Friday, but still managed to close at $63.45 a barrel. WTI for May delivery declined 1.7 percent, but still managed to close at $55.74 a barrel.
Brent crude set a 2015 high on Thursday, hitting $64.95 a barrel. WTI followed suit, reaching a 2015 high of $57.42 on Thursday.
With the gains Brent crude has now secured two consecutive weekly gains and has risen in four of the last five weeks. Brent rallied a staggering 9.6 percent between Monday and Friday, the biggest weekly gain since October 2009.
Deepening turmoil in the Middle East may have provided the biggest catalyst behind the recent advance of crude oil prices. As Saudi Arabia entered its third week of aerial bombings on Yemen, fears about regional supply disruptions emerged after military personnel loyal to Yemen’s ousted President Abdurabuh Mansour Hadi took control of the Masila oil fields.
The 21st century has provided several examples of how geopolitical conflicts can prop up oil prices despite no underlying supply-demand imbalance. The two most recent examples are the Syria war and conflict in Ukraine.
Worsening Supply Glut
No discussion of crude prices is complete without commenting on the worsening supply glut. The global oversupply of crude is expected to worsen over the next several years, according to the US Energy Information Administration (EIA). The EIA recently said it expects US production to rise and peak at 10.6 million barrels per day in 2020. It is expected to moderate at 9.4 million in 2040.
Who’s responsible for the supply glut? Both OPEC and non-OPEC nations are deflecting the blame. The Organization of the Petroleum Exporting Countries (OPEC), which provides 30 percent of the world’s oil supply, has publicly stated it is not willing to “fix” prices without non-OPEC participation. Saudi Arabian production is currently at record highs, while Iran is planning to increase oil exports later this year, pending a successful agreement on its nuclear program.
What’s next for oil prices? The answer depends on your frame of reference. Crude oil is technically bullish, as the market appears to be shifting away from its previous range-driven environment. The $55 a barrel price point is a key “neutral” point for Brent. At this rate, it would take a significant reversal to push Brent back into bearish territory.
Long-term, the view is cautious at best, as analysts continue to warn about structural weakness in the market. The fundamentals paint a very clear picture of where crude prices will end up; while they are likely to remain supported above mult-year lows, few forecasts see Brent crude averaging more than $65-$70 a barrel over the next few years. The International Monetary Fund (IMF), for example, sees Brent crude at a little more than $58 a barrel in 2015. Prices are expected to rise to just over $65 in 2016, before approaching $70 a barrel the following year.