Commentary: Where to next for oil — $50 or $100?
Commentary: Analysts see oil headed higher but the question is when
SAN FRANCISCO (MarketWatch) — The U.S. oil market has been struggling for the last five months to get itself back above the $100-a-barrel level, but it doesn’t have to look very far to find the fuel it needs to do it.
Demand growth in emerging markets, high global oil prices, smaller spare production capacity from the world’s big oil producers and further political tensions in the Middle East and North Africa are just a few good reasons why many analysts expect oil prices to head higher in the long term.
But just when they begin that turn higher is a much more difficult thing to predict.
A quick look at a chart of oil prices traded on the New York Mercantile Exchange paints a clear picture of crude’s inability to regain the heights it had during the height of the tensions in the Middle East and North Africa earlier this year.
Crude-oil futures /quotes/zigman/2075833 CL1X +0.34% ended last year at $91.38 a barrel on Nymex, then climbed 25% to a high near $114 by the end of April and sank 34% to trade back below $76 this past week.
“The market is seeing some deflation from aggressive expectations about the possibility for fourth-quarter [supply] tightening, which were predicated on a continued outage of Libyan crude supplies and somewhat robust demand growth,” said Michael Lynch, president of Strategic Energy & Economic Research.
And at the moment, “the reversal of those expectations, along with commodity deflation in general, is leading investors to move away from oil,” he said.
Oil’s settlement below $76 on Tuesday was its lowest closing level in more than a year.
“Oil has had a wild ride with the trend clearly down,” said James Williams, an energy economist at WTRG Economics, but for the rest of the year, a price near the current level is most likely.
Problems in Europe or with the U.S. economy could drive them lower, while they could rise if the Saudis cut too much production in anticipation of the return of Libyan output or if there are further uprisings in the Middle East and North Africa, he said.
Nymex crude’s out of touch
The $80 or so crude price seen on Nymex, however, doesn’t really reflect the true prices paid for oil so they’re not really as low as they seem, and prices for oil products haven’t dropped much either.
Brent crude on London’s ICE Futures exchange has traded above $100 for the bulk of the year.
“Nymex oil prices are somewhat unrepresentative of global oil prices,” said Dan Gundersen, vice president of energy finance for Sandstorm Metals & Energy /quotes/zigman/596895 CA:SND +2.44% /quotes/zigman/596897 STTYF -3.53%
The disparity between world oil prices — benchmarks such as Brent and Nymex oil prices has “increased dramatically over the past year or so with the current spread exceeding $20 per barrel, and an unprecedented spread of over $26 a couple [of] months ago,” he said.
That’s mainly due to regional supply and transportation issues at Cushing, Okla., the delivery hub for Nymex crude. “There is a glut of landlocked oil around Cushing that is commanding a lower price than worldwide prices,” said Gundersen
