The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is up more than 4% over the past week and oil could be poised for more upside if recently positive analyst outlooks on the commodity prove accurate.
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels.
“But at the end of the summer, as OPEC and the International Energy Agency (IEA) started reporting stronger-than expected global oil demand growth and an accelerated pace of inventory declines, the market sentiment began to change. As 2018 and the November 30 OPEC meeting draw nigh, the cartel is said to be favoring a 9-month extension of the deal through the end of next year,” reports OilPrice.com.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could at least keep oil prices steady around current levels in the second half of 2017.
According to the Energy Information Administration, crude oil product could hit 9.9 million barrels per day in 2018, which surpasses the prior high reached in 1970 of 9.6 million barrels per day.
The Permian Basin will be a key factor in the growth of U.S. oil production. Of the 940 oil rigs in operation, about 377 are in the Permian Basin. Many oil producers have also decided to drill but not complete wells in the region due to minor transportation constraints, which leaves a lot of untapped potential on the ground.
Still, some analysts are bullish on oil going forward.
“We believe that the backwardation in the Brent futures strip supports our thesis that the market is currently undersupplied, and if the OPEC/non-OPEC cuts are extended through the end of 2018 then we estimate the oil market will remain in modest under-supply until 2019,” according to Jefferies, OilPrice.com reported.
Several other Wall Street banks have recently boosted oil price targets for 2018 as well.
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