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Oil Update–January 2018

With West Texas Intermediate hitting $66.66 a barrel last Thursday, my forecast of between $50 and $60 a barrel for January was too pessimistic. There were a number of factors that led to higher oil prices, including uncertainty regarding potential new sanctions against Iran, international oil inventories depleting faster than expected, hedge funds’ extreme positioning in oil futures, solid cooperation amongst OPEC members with the possibility that Russia might work cooperatively with OPEC for many years, a depreciation of the US dollar, strong economic global growth, declining oil production from Venezuela, and a buoyant stock market where the S&P 500 has appreciated roughly 7 percent so far this year. All these factors have led to optimism that oil prices will remain strong this year.

I am always cautious about large price moves. Although the prior and other factors might propel oil prices even higher, I expect that prices will be bound between $60 to $67.50 for the next few weeks. While there is some room to the upside, I anticipate that the prior factors will likely prevent oil prices from falling too far in the near term.

Because I have been surprised by the strength of both oil prices and the stock market during the first few weeks of this year, I do not have much conviction in my oil price forecast. I am taking a wait and see approach for February and will reassess toward the end of the month.

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