Where are crude oil prices heading?

Last week, this scribe lashed out at the speculative commune who gathered to talk about their month-end manipulation of crude prices. I also pondered, ever so pondifferously, on the thought processes that must have been eddying in the minds of these OPECians. Some readers opined that I may be of the opinion that crude, distillate, and gasoline prices have bottomed out and are now heading for a politically motivated and noteworthy increase. Still, I continue to be asked, “Where are prices going or not going, and why or why not?”

Pass the porridge.

 I’ll start off by saying that any medium-to-long-term prediction by any analyst with any experience in the energy sector is a medium-to-long-shot when it comes to being accurate. The reason for this politician-style answer is that the direction of the price of petroleum products is dependent on objective and subjective information, which must then be interpreted without the benefit of an interpreter.

The most objective information used regularly for short-term (indeed, any term) forecasting is the weekly EIA report out of the U.S.; it is the most valuable and comprehensive collection of energy data produced anywhere in the world – and released from the largest energy consumer in that same world. Without this information the term price forecasting would be lexicon-less.

 The EIA report is mandated by the U.S. Department of Energy and therefore compulsory.

 There is an alternative source of energy data from the American Petroleum Institute (API), but this is industry sponsored and voluntary. The API report is released one day before the EIA publication and looked on by speculators as a heads up for the next day EIA report.

 Personally, I don’t know why the API report is even read, let alone published. Not only is it biased, but in most cases the data doesn’t come close to the numbers in the EIA publication. This causes irrational spikes in market prices for diesel and gasoline that are not warranted and slow to correct.

 For example, this past Tuesday, April 26, the API said that U.S. crude inventories fell by 1.1 million barrels, and crude settlement prices then increased on the NYMEX, as did racks for diesel and gasoline. The very next day the EIA reported that crude levels went in the opposite direction and actuallyincreased by 2.0 million barrels. So one would think that crude should have then retreated, but it did not because the damage seems to have been done subliminally – the API report stuck in the minds of the speculators so prices held…for absolutely no reason!

 The U.S. inventories of crude oil, combined with its refined derivatives, are only one of nine factors that go into any forecast covering any time period. But I will not let this prevent me from answering the lead question: Where are prices going?

 I’ll keep it to a three month frame:

·        You can forget this year’s low of $27/bbl, and you won’t see $70 to $80/bbl until perhaps early 2018.

·        Look for $47 to $50/bbl as a comfortable range – Why? The driving season is yet to begin, but gasoline demand continues to hold, even now being up 5% year-over-year. Maintaining or increasing demand for gasoline will increase refinery runs and lower crude inventories. This will increase crude imports as well as prices to the point that U.S. shale oil production will start up again keeping a cap on crude prices at the $50/bbl level.

Lastly, if crude does go higher, then shale oil production will increase which will force the Saudis to lower crude prices by increasing production.

Dizzy yet?

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Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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