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.
Consequently, the markets may be in for an extended low oil environment. The International Energy Agency also recently warned that the world could “drown in oversupply” of oil in 2016, especially as Iran’s exports begin flowing into global markets.
Melek “added that while oil is unlikely to surge to $100 per barrel, his current forecast of $60 is very reasonable,” reports CNBC. “While some energy analysts have been suggesting that M&A will turn the tide in the beaten-down energy sector, Melek isn’t so sure.”
Oil’s ongoing weakness has prompted an array of big-name Wall Street banks to slash their price forecasts on crude. Morgan Stanley analysts, including Adam Longson, head of energy commodity research, argue that investors are putting too much emphasis on fundamental factors and are not paying attention to an appreciating U.S. dollar.
Goldman Sachs Group has also forecast oil to drop to $20 per barrel but attributes further weakness to potential storage tank limits as producers keep pumping until they completely fill up storage space and halt some production. However, Goldman also sees a new bull market being born from oil’s current bear market in the second half of 2016.
United States Oil Fund
