Will Crude Oil's Rally Last?

05/01/2015 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

The recent rally in crude oil has some wondering if this market can still move higher and MoneyShow's Jim Jubak shares his most likely scenario for prices.

For the week ahead, watch to see whether the very nice, strong, profitable oil rally lasts. What we've seen is West Texas Intermediate, which is the US crude benchmark, go from $43 or $44 up to $57 in mid-April. We've seen Brent, which is the European benchmark, climb to about $65 or $66 a barrel.

The question really is; are these prices high enough to bring a big surge of oil out of inventories, out of storage, and send oil prices back down. That's the thing to watch for this period, this week, next week, whatever, and it really is crucial.

A lot of forecasts early in the year for Goldman Sachs, etc., Morgan Stanley, said, basically, that we're going to finish the year at $65 a barrel. That's not at all very far from where we are now. What they were envisioning was a run up to $65, $66, $70, and then back down, so, basically, looking at this as being the recovery.

The question is how we get there, whether we stay steady at this level, whether we see oil prices fall back.

My own personal belief would be that we're going to see oil come out of storage and we'll send prices back down before we send prices back up but we're looking at US inventories of about 500 million barrels, that's as high as they've ever been.

There is what's called fracklog, which is all of the wells that have been temporarily, they've put a cork in them basically. They didn't finish the last bit that they need so that's all potentially ready to come back on the market. OPEC, especially in countries like Nigeria, or Libya, or Iraq, or Iran, or Russia that are facing big budget deficits because of the low price of oil, you would think that this would bring more supply under the market, that they will bust the very seldomly adhered to limits on production, OPEC is already over it so how much more oil will come out.

China has been buying oil like crazy. They've got oil tankers in storage all up and down the Chinese coast. Will any of that come back into the market? These are the questions to answer. If you look at oil prices over the next month or so, how quickly will it come in the market? Will people decide that they're going to hold out further?

One data point that suggests they're not going to hold out a whole lot further is in the oil futures market. Looking at the price of oil in the futures market for January 2019, two months ago, it was $68, $69 a barrel. It is now down to $66 so, basically, you've got people saying, looking that far out, that oil is not going to go up a whole lot further from here and getting a little more pessimistic about that going forward.

Related Articles on COMMODITIES