Crude Makes Weekly Gain, but Analysts Think We've Already Seen Highest Prices of 2018

Some experts think it's entirely likely Brent could soon drop below $60 per barrel. File Image / Pixabay

With much made in the media of rising tensions in the Middle East, U.S. crude prices unexpectedly spiked upward late Friday morning, resulting in West Texas Intermediate settling 1.88 percent higher at $62.34 per barrel for a weekly gain of half a percent - and pundits trying to explain the abrupt rise.

Gene McGillian, manager of market research at Tradition Energy, said it could be shorts covering ahead of the weekend, which involves traders buying back securities: "The shorts in the market have to be nervous that some kind of news comes out."

Citing a confidential document, Reuters on Friday reported that Britain, France, and Germany have proposed fresh EU sanctions on Iran in an effort to persuade U.S. president Donald Trump to preserve the 2015 nuclear deal with Tehran; this is supposedly in response to Trump replacing his secretary of state with the more hawkish Mike Pompeo, which caused pundits to conclude that this would be a nail in the coffin for the deal.

Although its impact is questionable, CNBC also saw fit to note that a 60 Minutes segment with Mohammed bin Salman, crown prince for Saudi Arabia, is set to air Sunday in which he is described by Bahram Qassema, spokesman for the Iranian Foreign Ministry, as a "delusional and naïve person."

The news agency pointed out, "Elevated political uncertainty could add up to traders being nervous about short oil positions into the weekend."

As for the crude market further ahead, Reuters mused that the International Energy Agency, the Organization of the Petroleum Exporting Countries (OPEC), and the U.S. Energy Information Administration "have all underestimated the growth in production outside of OPEC and specifically, in the United States," and that for the first time since OPEC launched its production cuts in mid-2017, "the three agencies are predicting the global oil market will face a surplus in 2018."

Norbert Ruecker, head of commodity research at Julius Baer, said, "According to our estimates, the global inventory tightening trend should slow and eventually reverse with storage levels no longer declining but again rising later this year."

Additionally, with $80 billion in net long positions riding on the positive roll-yield for Brent, a negative turn would translate into a lot of dollars suddenly in negative earnings, which would mean a sell-off that could see Brent drop below $60, according to Bjarne Schieldrop, head of commodity strategy for SEB.

But there's another way to look at current crude prices, and John Kemp, market analyst at Reuters, spelled it out Friday by stating that "Short-term volatility has been trending downwards since early 2016 and in January fell to its lowest since August 2014."

Kemp reminded the analytical community that "prices have soared by more than 40 percent since the middle of 2017," with the upward adjustment being "smooth and orderly."

He also noted that "Record buying of futures and options linked to petroleum by hedge funds and other money managers has been matched by strong interest in short-selling and hedging from producers."

However, Kemp conceded that volatility usually occurs without warning, and "Several risk factors could cause an upsurge in volatility in the next few months, including the unwinding of concentrated hedge fund positions, uncertainty surrounding future growth of U.S. shale production and macroeconomic risks to oil consumption."

Bank of America Merrill Lynch earlier this week offered a rare voice of optimism by declaring that despite the might of U.S. shale, market circumstances are healthy enough to allow for oil prices to move above where they currently are.