Stocks aren’t the only asset exhibiting volatility lately. Along with prices for just about every other risky and cyclically sensitive asset, oil prices plunged in late summer, and then quickly surged.
From its June peak to mid-August, the U.S. benchmark West Texas Intermediate (WTI) collapsed by nearly 40 percent, according to Bloomberg data. Then, as the data show, crude prices staged a mini bull market in the last week of August, when the WTI rose more than 25 percent in its fastest three-day advance since the first Gulf War in 1990.
But while the recent crude price movements have been extraordinary, I still believe that oil prices will, for the most part, remain range bound, with the global benchmark Brent trading between $50 and $65 and WTI trading at a modest discount. Though crude is currently a bit below the lower end of that range, oil prices should, for the most part, remain within that channel going forward, with a bias toward the lower end.
Why? The oil market’s basic fundamentals haven’t changed much—apart from some further deceleration in the global economy-since earlier this year when I discussed a range bound energy market. Plus, the recent drop in oil prices has led to supply and demand responses that are helping to keep oil markets from melting down.
On the supply side, U.S. oil production is now in outright decline. Recently revised numbers from the U.S. Energy Information Administration (EIA) reveal that U.S. production peaked in early June at 9.6 million barrels per day (bpd). Over the past three months, it has fallen sharply, to just over 9.2 million bpd, the lowest level since February. This is the main reason oil prices have rebounded so dramatically in recent weeks.