Oil Futures Rally, Taking June Contract above $15 a Barrel

Oil futures rose to a seven-month high yesterday, sending the US futures contract up for the first time in a month, as high-pressure crude deliveries to the Platts and Argus delivery point in New York began to flood into the market.

The news that those deliveries will swell inventory by about 5 million barrels in June alone, in addition to likely seasonal builds in July and August, should not be a surprise. Crude oil will have reached $70 per barrel by October, that’s what a majority of market analysts expect. But a few are sticking with an optimistic $100 forecast. A lot depends on when you put that caveat on the decimal point.

The Wall Street Journal’s John Kemp is probably the most bearish of the doubters. He thinks oil prices will pop to $100 only if the cold snap provides strong demand on demand in the US and parts of Asia and Europe, reviving consumer’s spending in the months ahead. Kemp’s confidence is built on the widely held belief that the breakup of OPEC will be disruptive, though not necessarily disruptive enough to push up oil prices. He says that oil prices at $100 will hit resistance that ends up being weaker than his call suggests.

Taking Kemp seriously, we’d have to cut global demand projections for oil by 50% to reach his forecast. Of course, that’s precisely what the oil-producing countries who want out of OPEC are aiming for; oil prices will likely fall through the floor, as ever, then begin to recover as consumers curtail their own oil consumption. The direction will be downward in the next couple of years, says Kemp, and $60 oil will soon be here.

A second-string analyst, Bjarne Schieldrop, is more pessimistic about oil prices at a Bloomberg forum today. Schieldrop thinks we’ll hit the $75-per-barrel level.

Nevertheless, Brent crude prices advanced past $70 yesterday, back above their February high. That $70 line is a major psychological barrier. If prices stay above it, you have to think that OPEC will be contemplating the end of production cuts sometime soon.

While that would be bullish for oil prices, it’s actually bad news for oil producers, just as markets appeared to be weighing oil production fairly heavily as a drag on growth, according to a fresh report from Morgan Stanley. As the bank explains it, “we believe the fundamentals appear to have returned to a more meaningful discount to the front-month WTI price,” raising the prospects for a rebound in US production.

Morgan Stanley sees US production rising by 1.7 million barrels per day over the next few years, equal to nearly a full percentage point of growth in overall oil consumption. That’s good news for US producers in theory, but it’s not good news for the US economy.

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