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As the U.S. market begins its recovery from the double whammy served up by hurricanes Harvey and Irma, my earlier projections of where crude oil prices are headed have come true.
Just a little quicker than anticipated.
As I am writing this, WTI (West Texas Intermediate, the benchmark crude rate for futures contracts written in New York) has moved above $50 a barrel for the first time in over five weeks.
In fact, it's up 6.1% in barely three days. Meanwhile, Brent (the equivalent and more globally used benchmark set daily in London) is approaching $56.
Two months ago, I said WTI would be at $52 to $54 and Brent at $55 to $57 by the end of September. Currently, WTI is within $2 a barrel of its predicted range, and Brent has already reached it.
What's interesting is the fact that this rise is taking place while much of the Gulf Coast refinery infrastructure either remains offline or is running at partial capacity.
After all, refiners form the bulk of crude end users. A reduction in refinery flow rates usually cuts into crude demand and, thereby, pushes prices down.
Despite that, oil prices are going up this morning. There are three reasons for this…
Ignore the News – Oil Demand Is Rising
You'll have seen these mentioned in past issues of Oil & Energy Investor.
First, the crude oil balance we've talked about for some time has been coming in quicker than anticipated. That's the case even with the rising U.S. production levels.
But remember, oil prices are set by global developments, not (primarily) by what happens in North America or Western Europe.
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Both the International Energy Agency (IEA) in Paris and the U.S. Energy Information Administration (EIA) have recently reported that the balance between supply and demand should be realized in the first quarter of 2018. That is much earlier than previously forecast.
Now, the arrival of this balance means the price floor will rise.
As I've noted several times in Oil & Energy Investor, it's the floor rather than the ceiling of the oil price range that's most important to an investor.
That rise prompts oil traders to peg the price of contracts to an expected higher cost of the next available barrel, rather than simply to take a standard estimate of where that barrel will be.
Of course, this increases the market price with a resultant knock-on effect in all manner of oil-related stocks.
Second, demand is intensifying.
Once again, this is happening more in other places in the world than in the United States. Globally, the IEA, EIA, and OPEC have now all revised their expectations for oil demand up (again).
But even in the American market, demand is moving up.
Third, the ability of American producers to ramp up production in short order always puts a damper on any short-term race back to $70 levels and higher.
Then there's also the possibility that OPEC members may choose to loosen their present restrictions on production.
On the other hand, as we've talked about before, Venezuela's production is rapidly declining. That, combined with growing pressure on Libyan, Nigerian, and Mexican production, offsets U.S. production growth.
Remember, American oil is now increasingly exported into higher-priced foreign markets, cushioning the impact on the domestic market from any rise in volume.
Exports have been adversely impacted by Harvey in parallel to the pressure put on refineries. But that situation is now also improving in Corpus Christi, Houston, and the Channel.
And note that the WTI price is rising despite the dent Mother Nature put on exports.
The "Oil Spread" Keeps Showing Higher Prices Are Coming
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
Why is it a good thing (other than for money) that America now exports so much oil to foreign markets? My thinking goes like this: If I keep giving kids my money…..maybe some day I will run out …. and I might need that money to pay for medical, dental, nursing home care, etc? Are we confident that America has an absolutely endless supply of oil that we can "just let it go"???