Forex Trading Library

Is $85/bbl Crude Oil a Realistic Projection?

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The price of crude oil has been a lot less volatile this week, slowly drifting higher. But WTI seems to be having some trouble breaking through the $75/bbl level. There are a lot of factors pushing and pulling crude prices, but they seem to be equalizing for the moment.

One thing that might have stood out yesterday is the EIA’s report showing that US crude inventories jumped by 5M bbls. The market had only expected 0.6M bbls being added to commercial stores. Usually a surprise like that tends to move crude prices substantially, but there are nuances to explain the muted reaction.

There’s More Going on Than Meets the Eye

While crude inventories grew, distillates dropped. Analysts pointed to the culprit likely being the shutdown of a major refinery in the midwest. The BP-owned Whiting Indiana refinery was shut down due to a power outage last week, and has not been restored. That could cause supply pressure on gasoline in the US, which might be reflected at the pump. But the higher inventories aren’t seen as being due to a major supply or demand issue that typically drives prices.

Instead, analysts pointed to rumors through the early part of the week suggesting that Israel and Hamas might reach some kind of agreement on a ceasefire. But when the details of the proposal were made known on Wednesday, the market was not surprised that it led to a rejection by the end of the day. Despite the setback in negotiating an end to hostilities in Gaza, the market seems to have largely priced-out a large disruption in supply due to the conflict spreading in the Middle East.

Things Going Back to “Normal”

It has been four months since the terrorist attack that sparked the latest war in Gaza. While geopolitical tensions have increased, actual supply of the crude oil remains unaffected. The situation in the Red Sea is causing crude shipments to take longer, but they do arrive at their destination. Supply remains steady. Even so, OPEC members are sitting on around 5M bbl/d of unused supply that is being curtailed to help push up prices. That could help cover potential supply hiccups from unexpected geopolitical events.

Those efforts to boost the price, however, are being stymied by the US once again reaching record production as the world’s largest crude producer. In fact, the growth in US production has more than offset the amount of crude supply that OPEC has agreed to curtail, according to the EIA’s latest market analysis report.

What About that $85/bbl Crude?

While reporting on the recent increase in US production, the EIA doesn’t believe it will be sustainable through the year. After February, crude production in the US should start to decline, and the world would experience around a 160K bbl/d deficit, according to the US energy regulatory agency.

The EIA does acknowledge that prices could move because of geopolitics, but bases its projection of the crude oil prices on supply and demand dynamics. Crude demand is expected to grow once again this year, and outstrip supply. That’s the reason the EIA gives for its forecast that crude prices should move back above $80/bbl later in the year, and trade in the mid-$80/bbl range.

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