Oil Is Up 25% Since February: Is That Enough to Bring New Supply Onto the Market and Stall the Rally?

04/29/2015 10:04 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Forecasts at the beginning of the year were calling for oil to finish 2015 at $65 a barrel, so MoneyShow’s Jim Jubak questions if that yearend price will be met, if so, how it’ll be reached and if it’ll be enough to push new supply back onto the market.

So how far will the current oil rally run?

Remember that forecasts at the beginning of the year were calling for oil to finish 2015 at $65 a barrel.

West Texas Intermediate closed Tuesday, April 28, at $56.91 after a climb of 24% from February through the end of April. That puts the US benchmark within 14% of that projected end of 2015 high.

The second big issue for oil prices in 2015 has always been how they will get to their yearend levels. (The first big issue, of course, is what that yearend price will be.) Forecasts from Goldman Sachs, for example, projected a rocky path to $65 for West Texas Intermediate with oil making several assaults on that height and falling back several times.

If that’s the case, some profit taking in oil (and oil funds such as US Oil Fund (USO), up almost 20% from its end of January low) would be a good idea right about now. The idea would be to sell and then buy in again when oil has given back some of its gains but looks about to resume its advance toward $65 a barrel.

That trading strategy might not be the right one for this market, but from the price of oil futures, it looks like it is an increasingly popular thought. Oil for January 2019 delivery was trading at $68 a barrel in the futures market two months ago. On Friday, the price in the futures market had tumbled to $66.35. It sure looks like some traders think that oil prices are headed for a retreat.

It’s not hard to see evidence for what they’re thinking. At 500 million barrels, US oil inventories are at record highs. US producers in shale geologies have left a significant number of wells in an almost complete state that would enable them to quickly put what’s being called a fracklog into production. OPEC producers with badly strained budgets are already breaking the cartel’s production quotas and are looking to produce even more above their quotas. China leased every oil tanker it could when oil was at $50 a barrel and they’re now sitting off Chinese ports filled with oil.

What price will bring a big part of this inventory back into the market? If you bought at $50 and put that oil into storage (which costs you money every month), $65 for Brent has got to look attractive. 30% profits do. 

Is it worth it to risk that profit in order to get $70 a barrel, an additional 7.7%?

Watch oil for signs of a stall in the rally. That might well be enough for oil to give back some of its recent gains.

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