Rising Inventories Prompt More Market Losses for Crude, but Predictions Persist of $60 Oil

With the Energy Information Administration reporting that  U.S. inventories climbed by almost 5 million barrels to 533.1 million last week and far outpacing forecasts for an increase of 2.8 million, crude continued its downward spiral on Wednesday; however, two respected institutions think a rise to $60 later this year is still possible.

West Texas Intermediate settled down 20 cents to $48.04 after hitting a session low of $47.01, while Brent dropped 31 cents to $50.65, after falling as low as $49.71.

U.S. bank Jefferies said the Organization of the Petroleum Exporting Countries (OPEC), which as recently as the beginning of this year was viewed as the mechanism that would bring about sustained higher prices via its cutback initiative, noted that financial markets have "lost patience" with the cartel because the initiative has failed to trigger significant inventory drawdowns.

However, on a more upbeat note it said the market is still under supplied and that if the cutbacks extend to the end of this year, inventories will draw down and prices might rise above $60 in the fourth quarter of 2017.

Eric Lee, energy analyst at Citi, also forecasts a somewhat brighter near future; he told Bloomberg television that the current dismal market performance is partly attributable to "some of the air coming out": "there were extremely high levels of money management as fund positioning on the long side for oil; what we've seen over the last week with the selloff is a lot of that flushed out, and we're back at more reasonable levels - and this gives us a bit more confidence that we'll be finding more of a floor at $50."

Lee added that the U.S. crude production increase may not be as troubling as many think, because the spring season heralds an increase in refinery crude demand, this year on the order of 1 million barrels per day between now and April: "So we should be seeing crude draws soon."

Lee concluded, "We are constructive for oil prices towards the second half of this year; we were cautious about the first quarter, but we're really looking for the $60s in the fourth quarter of this year."

Earlier this week, Rusty Brazeil, president and CEO of RBN, cheerfully predicted that crude will remain in the $50 range for the next five years: "It's the ingenuity of U.S.producing companies: we've learned how to produce and make money at 50 bucks."