Have oil prices soared as high as they can go, at least for the next few months?
There seems to be a growing sentiment that top oil prices have been reached, as oil prices have stalled in January, but some industry observers do see oil stepping into a higher gear.
Here's the scenario.
"Oil prices faltered at the start of the second week of the year, as fears set in about a rapid rebound in U.S. shale production," says energy expert Nick Cunningham in a new post on OilPrice.com this week. "For the better part of two months, optimism surrounding the OPEC deal has buoyed oil prices, but bullish sentiment from speculators are showing early signs of abating, raising the possibility that the oil rally is running out of steam."
Cunningham points to a stronger count on U.S. oil rigs over the past ten weeks, amounting to "200 fresh rigs looking for oil." Continued uncertainty over the recent agreement among OPEC nations to curb supply is also holding prices back, he notes.
Oil futures contracts reflect those potential supply conditions, as February and March Globex crude oil futures are down to $52.24 and $53.09, in mid-Wednesday trading.
Of course, in general, oil industry trackers have been calling for an oil price cap at around $60 per barrel in recent weeks, mostly due to positive sentiment over the OPEC supply limits.
"I think prices have room to run to about the $60 area," says Lila Manassa Murphy, portfolio manager at Federated Investors in Dallas. Murphy, who's headed to Abu Dhabi to meet the Saudi oil minister this week, notes that OPEC (along with a pledge from several non-OPEC countries) has put in an effective floor at the $50 level and the Saudi cartel, in particular, remains committed to doing whatever is necessary to support oil prices at that level, including the possibility of further cuts to buoy prices.
"However if OPEC is a floor, U.S. shale is likely to provide something of a ceiling," Murphy adds. "Producers are ramping activity, capital budgets are up substantially year over year, and drilling efficiencies have shifted costs lower." Murphy expects some services inflation in the back half of 2017, but believes that "much of the cost savings we have seen are permanent" as shale matures and the oil market sees gains from "greater scale and full field development."
For the short-term, a price spike of up to is $60 per barrel is unlikely, other oil experts says. But the long-term upside is positive.
"We see substantial upside for oil prices right now," says Jay Hatfield, co-founder and president of InfraCap and portfolio manager of its MLP ETF AMZA. "We think that the near-term range for oil is $50 to $55 per barrel, and we currently are at the bottom of that range." Hatfield says prices are supported by "continued steady worldwide growth" in demand driven by growth in worldwide automobile ownership and by incremental declines in production from high cost basins, primarily in deepwater offshore areas and the Canadian tar sands. "In addition, OPEC is in the process of reducing production which will be supportive even if compliance is only partial," Hatfield says.
Hatfield says these supportive factors are offset by the fact we are in a seasonally weak period of economic activity and demand for oil prices. "We believe oil prices are likely to break-out of the current $50-55 range to the upside as we head into the summer driving season," he adds. "We see prices in the $50 to $70 range for the year."
Daryl Montgomery, a long-time energy investor and author of four books on commodity trading, says he's been bullish on oil prices since last February, when prices largely bottomed out.
"Oil has periodic price collapses every five to seven years," Montgomery explains. "Every time this happens, the doomsayers come out of the woodwork and say the price is never going up again. They are always wrong. Prices always go back to their previous highs and eventually higher."
Montgomery says the key to analyzing oil, like every other trading market, is supply and demand. "However, if you look at all the ink that has been spilled over the years discussing the market, at least 95% deals with supply, and demand is frequently never discussed," he says. "You just can't do an accurate analysis that way." He says demand for oil has only fallen in only three years since 1859, or the last 157 years.
Montgomery says the key to analyzing oil, like every other trading market, is supply and demand. "However, if you look at all the ink that has been spilled over the years discussing the market, at least 95% deals with supply, and demand is frequently never discussed. You just can't do an accurate analysis that way." He says demand for oil has only fallen in only three years since 1859, or the last 157 years.
"Yet, article after article on the oil market says demand is falling, when it really isn't," he notes. "The rate of increase in demand can fall, but demand for oil almost never does. In fact, global oil demand grew rapidly between 2009 and 2015, rising on average 1.6 millions barrels per day, each year."
Like Murphy, Montgomery sees oil prices rising up to $60 per barrel by the end of the first quarter of 2017. He cites rates of growth in both supply and demand, with one outpacing the other.
"Yes, supply is increasing, but demand is increasing faster," he says. "Like in every other market on earth, throughout history, this means prices go up. Oil prices more than doubled in 2016 from the near-term futures of a $26 low in February to the close of the year. During that entire time, oil bears kept saying the price wasn't going up any further, and like a broken record, they are still saying it."
"By summer oil should reach $70 to $80, but it will be difficult for it to go higher in the fall for seasonal factor reasons," he adds.