Supply and demand gap
High crude oil and product inventories tend to weigh heavily on the crude oil market, whereas low crude oil prices tend to narrow the supply and demand gap. Notably, December 2016 WTI (West Texas Intermediate) crude oil contracts are trading at a discount of $4 per barrel to December 2017 WTI crude oil contracts—the widest gap in almost eight months. This suggests that supply could outstrip demand to a larger degree in the short term than in the long term.
Crude oil price forecast
On July 26, 2016, the World Bank forecasted that Brent and WTI will average $43 per barrel in 2016. Prices will trade higher due to crude oil supply outages and higher crude oil demand in 2Q16.
A Wall Street Journal survey of major banks predicted Brent crude will average $56 per barrel in 2017, as compared to $57 per barrel in its June’s survey. The survey added that WTI could average $55 per barrel in 2017, as compared to $56 per barrel in its June survey. This survey predicts that WTI and Brent crude oil prices could trade below $50 per barrel for the rest of 2016.
Meanwhile, the strong US dollar and weak demand cues from Japan and Europe will likely continue to pressure crude oil prices. BNP Paribas and JBC Energy estimated that Brent crude oil could test as low as $40 per barrel in 2016 due to seasonal demand weakness. Barclays projects that Brent crude oil prices will trade as low as $40 per barrel due to the UK’s recent Brexit vote in 2016.
Such rollercoaster rides in crude oil prices impact the earnings of oil and gas producers like Stone Energy (SGY) and Sanchez Energy (SN). They also impact funds like the iShares US Oil Equipment & Services ETF (IEZ), and the PowerShares DWA Energy Momentum ETF (PXI).
For related analysis, keep checking in with Market Realist’s Energy and Power page.