How High Will Oil Prices Go This Year?
Introduction
This week we hit some milestones in the year-long recovery from the oil demand crash of 2020. West Texas Intermediate, (WTI) hit and moved past the $55.00 level, and Brent moved closer to $60. These are some important psychological barriers for the market, and if sustained, as we expect they will be, will push prices higher.
What happened?
The API announced a significant draw of ~4.3 mm barrels in crude stocks yesterday when a modest build was expected. Moves lower in gasoline and distillate stocks bolstered this price move, as it suggested refineries were cranking out product to meet present and anticipated demand.
In recent weeks oil prices had been resistant to adverse data (inventory builds of crude and refined products) and had continued to inch higher. The market’s relief at this confirmation of demand pushed prices for WTI through that critical $55.00 threshold.
If the EIA confirms this move today, (these reports are sometimes contradictory), we expect another push higher for both crudes, WTI and Brent. Particularly if the confirmation is of significant proportions, like 8-10 mm barrels. Continued price advances in crude will soon reverse the sluggishness we have seen in the oil equities market. Oil equities prices are typically off 15-20% from recent highs in an apparent disconnect from the recent strength in the underlying data regarding oil.
Crude stocks are falling into the 5-year range
Last week’s ~9.9 mm bbl draw moved the supply graph back into the 5-year average for the first time since mid-2020. This removes another psychological barrier for the continued rise in crude prices, as the market will now begin to shift its concern from inventory overhang to worrying about secure supplies. I discussed this in detail in an OilPrice article last month.
The EIA also noted an increase in refinery throughput for the previous week, which is not something you expect this time of year. That said, we are still off about 2-mm BOPD from a year ago. This increase is bullish for prices as it implies rising demand at the retail level.
