Crude oil prices are rising again today amid rising confidence that supply gluts are shrinking. But Merrill Lynch cut its forecast for brent crude, predicting a $54 a barrel average price for 2017.
Exchange-traded funds linked to oil prices, continued to climb today as crude prices remained on track to end the week in the green amid data showing that the U.S. crude glut is shrinking and OPEC’s production cuts are making a dent in global supplies.
In recent market action, light, sweet crude futures for delivery in June climbed 57 cents, or 1.2%, to $47.90 a barrel on the New York Mercantile Exchange. July brent crude futures on London’s ICE Futures exchange picked up 55 cents, or 1.1%, to $50.77 a barrel.
So the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL), climbed 0.8%, extending yesterday’s nearly 4% surge, and the U.S. Oil Fund (USO) rose 0.9% to $9.94. The Energy Select Sector SPDR ETF (XLE), however, inched 0.1% lower to trade at $68.03.
But how much higher can crude oil prices climb?
Merrill Lynch cut forecasts for brent crude prices. It now expects the global benchmark to average $54 a barrel this year and $56 a barrel next year, down from the previous forecast of $61 a barrel and $65 a barrel respectively.
We bring down our forecasts to reflect the crude reality: stocks are still too high and U.S. supply is set to recover faster than we anticipated. We now see Brent averaging $54/bbl in 2017 and $56/bbl in 2018 compared to $61 and $65 prior, but we note that our projections remain $5/bbl on average above the current forward. For WTI, we now project $52/bbl and $53/bbl, compared to $59 and $63 prior.
Crude prices had hovered near five-months lows earlier this week, but surged yesterday after the Energy Information Administration released data showing a 5.2 million barrel drop in U.S. crude stockpiles for the week ended May 5, far exceeding market expectations.
The drop was evidence to some that demand is robust in the U.S. Others took it as proof that the move by OPEC and other big oil produces to cut global crude supply is working.
Today, OPEC released data showing that production fell by 18,000 barrels a day April, even as Saudi Arabia raised output.
The commodities research team at Goldman Sachs this week reiterated a base case for the U.S. benchmark West Texas Intermediate price at $50 per barrel and spot prices of $55 per barrel in 3 months. The note by analyst Jeffrey Currie entitled “Long-term surpluses create near-term shortages redux” weighed in on last week’s commodity rout.
… Given that the market is now out of patience, upside will need to be front-end driven, coming from observable near-term physical tightness in the coming months. At the same time, lower long-dated oil prices could accelerate the shift into deficit markets by curtailing the market’s ability to grow future production through forward sales, i.e. fear of long-term surpluses reinforces near-term shortages. This is important as the core of our overweight recommendation in commodities comes from backwardation and the positive carry it generates when spot prices exceed forward prices. As a result, we maintain our commodity overweight recommendation and are forecasting 3-month and 12-month ahead returns of 13.3% and 12.2% respectively ….