Signs that crude futures may hit much higher levels are converging, say oil traders and analysts, some of whom predict that Brent [LCOCV1 124.12 — UNCH ] crude could reach $200 a barrel within the next 12 months.
Mark Lennihan / AP
The biggest issue, they say, is that global crude supply remains uncommonly tight — a scenario that’s unlikely to be alleviated any time soon.
Even though Libya’s oil has largely returned online after the political disruptions that took it off the market last year, and Saudi Arabia is generating its highest output in three decades, the available crude is just barely meeting demand. The summer driving season in the U.S., which begins in April, could put further pressure on prices.
The cash, or physical price, of crude — which refers to what’s paid for the commodity when it’s shipped from a producer to a buyer — has largely exceeded the price of Brent futures since mid-February (a situation referred to in oil trading as “backwardation.”).
The effect on the home front is already being felt: In the U.S., gas prices are at $3.86 per gallon, according to OPIS, a stone’s throw from the $4 mark that created big concerns last year.
Still, it’s unclear that releasing oil from the Strategic Petroleum Reserve, a maneuver the White House made last June 23 in hopes of easing prices at the pump, will be much of a fix.
Gas prices were roughly $3.60 when the drawdown occurred, and were depressed for only a few days before climbing back over $3.70 a month later. Because of that, many traders tend to dismiss the recent chatter in Washington about releasing more oil from the SPR as bad politics.
“The seaborne oil market is extremely tight,” says one bullish hedgie. “As much as the politicians love blaming speculators, if the market was up on speculation and not fundaments, the physical market would be trading at a discount.”
Goldman Sachs [GS 125.99 -0.03 (-0.02%) ] commodities analysts agree with him, at least on the first part.
“We expect fundamentals will continue to tighten during 2012,” the firm said in a March 14 report, “pushing prices toward our 2013 Brent crude oil price target of $130 [per barrel]. With OPEC spare capacity and inventories low, the balance of risk to crude oil prices remains skewed to the upside.”