Oil prices have finally started to gain a foothold with prices stretching to a two-year high on Monday, supported by geopolitical tensions in the Middle East. While fundamental market changes could mean higher prices are here to stay, the first quarter could prove a “make or break” period.
This oil rally is to a certain extent, “very fundamentally based,” Andrew Lebow of Commodities Research Group, told FOX Business.
Oil‘s recent crash was caused by a massive market oversupply, but now production cuts have finally started to impact the market’s balance. According to Mr. Lebow, since June there has been a visible draw in oil inventories. He added that: “we are still in a surplus – but things are improving.”
This week, in its annual World Oil Outlook, the Organization of the Petroleum Exporting Countries (OPEC) noted the improving market fundamentals, adding that the oil market is finally rebalancing after a period of instability since 2014.
Geopolitical price support is fickle, but the fundamental change to the oil market could mean higher prices will be longer term. FOX Business asked Mr. Lebow if oil could hold onto its gains, and he said “it very well could” but cautioned that even though the oil oversupply is abating, we are still in a surplus with inventories above the normal five-year average.
Lebow added that a rally in oil prices into Thanksgiving is normal, but oil stocks can build in the first quarter, putting pressure on prices. A potential positive for oil prices in the first quarter would be a cold winter, which would increase demand.
In its short-term energy outlook released on Nov. 7, the U.S. Energy Information Administration (EIA) said it expects Brent crude oil (the international benchmark) to average $56 per barrel in 2018, and U.S. crude oil (West Texas Intermediate) will average almost $5 per barrel lower, or around $55 a barrel. Looking to February 2018, the middle of the first quarter, U.S. crude will likely trade in the $45 to $67 range.
On Wednesday morning, the EIA reported a surprise increase in oil inventories, with U.S. crude stocks adding 2.2 million barrels in the prior week, while analysts polled by S&P Global Platts forecast a draw of 2.7 million barrels.