Is the Oil Price Rally Under Threat?

Oil prices have pulled back slightly of late as signs of an increase in supply in some key markets are emerging once again. Of course, the damage isn’t big enough yet to unsettle oil industry players for now as Brent crude is still above $70 a barrel, while WTI crude oil is close to $62 a barrel.

But is there reason to believe that the oil price rally could be coming to a close in the near term? Let’s find out.

What’s Going Wrong?

The oil market has turned bearish on account of an increase in U.S. production. As it turns out, U.S. crude oil inventories are at their highest level since September 2017 as production came in at a record 12.3 million barrels per day last week, according to Reuters.

That’s not surprising as oil producers in the U.S. are increasing the rig count to boost production and take advantage of an increase in oil prices. According to energy services firm Baker Hughes, energy firms have added crude oil drilling rigs for the first time in three weeks.

At the same time, there’s the possibility of an increase in production from Saudi Arabia as the country could boost output in June to satisfy domestic demand. However, sources with knowledge of the matter believe that Saudi’s oil production will be within the oil production cut pact agreed with OPEC.

But don’t be surprised if oil prices keep rising because there are a few positive factors in play as well.

These Factors Will Drive Up Oil Prices

Crude oil demand in the U.S. will remain strong because people are expected to clock more miles in their cars because of higher employment and higher income.

The recent pullback in oil prices is temporary. That’s because the end market’s demand-supply dynamics will favour an increase in the price of the commodity in the future.

For instance, unemployment in the U.S. has dropped to a 49-year low of 3.6%. This means that crude oil demand in the U.S. will remain strong because people are expected to clock more miles in their cars because of higher income.

Meanwhile, Russia is expected to cut oil production to the tune of 1 million barrels per day next week because contamination problems have led to a restriction on its oil exports. Similarly, sanctions on Iran and Venezuela will also act as a tailwind for oil prices.

Given all these factors, it won’t be surprising to see oil prices march higher. Economists believe that the price of U.S. crude oil will average $60.23 per barrel this year as compared to the earlier forecast of $58.92 per barrel. They have increased their forecast for Brent crude to an average of $68.57 per barrel as compared to the earlier forecast for $67.12.

These new price targets were provided by Reuters’ monthly survey that took the opinion of 31 economists. As such, if you’re invested in oil stocks and fear that the latest rally might lose steam because of a potential oversupply, you might be wrong.

An increase in oil demand coupled with lower supply will be tailwinds for the oil market going forward and ensure that prices keep rising.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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