For a change, oil prices enjoyed a banner showing last week with crude futures surging 9% last Friday, helping the the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, to a gain of more than 8.3% on heavy volume.
The sudden bounce in oil prices may have also forced short covering among overly bearish traders and helped the rally push higher. Investors with heavy short positions are forced to cover, or buy back, their shorts in the event of positive reports that result in a share appreciation. Consequently, the additional buying momentum from short sellers covering their options contracts helped bolster prices even further.
However, some strategists believe oil’s rally has some legs and prices could increase significantly in the coming months.
“Bart Melek, head of commodity strategy at TD Securities, told CNBC’s “Squawk on the Street” on Friday morning that “there’s potential for a move lower, but any trend to the downside is probably unsustainable.”
OPEC has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers. [Oil ETFs Face World-Record Supply Glut]
Meanwhile, on the demand side, China, which consumes about 12% of the world’s crude oil, could see lower demand as economy shifts to a less energy-intensive economic model, the Wall Street Journal reports.