Oil prices have lost nearly 7% this month, but investors should be aware that a spike from last week’s levels to more than $120 is possible this year.
“This is a tight market. Supply and demand are close,” says Matt Badiali, senior research analyst at Banyan Hill. Global oil demand is expected to average 99.1 million barrels a day this year, but global oil supply stood at 98.8 million barrels a day in June, according to the International Energy Agency.
“We have supply constraints, thanks to Venezuela becoming a failed state. We have potential supply disruption with the Iran sanctions, and we have demand increasing with global growth,” Badiali says. “Disappointment that [the Organization of the Petroleum Exporting Countries] didn’t just open the spigots” on production also supports a higher oil price.
OPEC, along with nonmember allies including Russia, reached an agreement last month[1] to curtail some of its production cuts, essentially increasing output by one million barrels a day. In part, the move was meant to offset supply losses tied to economic woes in Venezuela, disruptions in Libya, and renewed U.S. sanctions on Iran.
But the decision by major oil producers to lift output didn’t cause a drop in prices—instead, they climbed shortly after the decision, with U.S. benchmark West Texas Intermediate crude futures CLU8, -0.82%[2] on June 29 settling at $74.15, their highest since November 2014.
The production increase “wasn’t enough to close the gap between demand and supply that has developed over the last year and a half,” says Leigh Goehring, managing partner at Goehring & Rozencwajg, a research house focused on natural resources. It has been roughly 18 months since OPEC and its allies implemented a pact to cut production.
Following the return of some Libyan production earlier this month, oil prices began to move sharply lower[3], pushing global Brent crude LCOU8, -0.20%[4] on July 16 to a three-month low of $71.84. Adding further downward pressure, a U.S. official suggested that the U.S. would issue some waivers for U.S. sanctions on Iranian oil; U.S.-Chinese trade tensions mounted, raising concerns about a drop in oil demand; and there was talk of a possible release of oil from the U.S. Strategic Petroleum Reserve.
Recent tweets from President Donald Trump have also called for Saudi officials to pump more crude and lower prices. It’s “very new and very unusual for a sitting president to be able to…comment on OPEC or oil prices to a degree where we see his tweets have an actual impact on the price” of oil, says James Bambino, managing director of the Oilgram Price Report at...