It has a long way to go, but oil could return to $100 per barrel if Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries (OPEC), has its way.
“Top oil exporter Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel, three industry sources said, a sign Riyadh will seek no changes to an OPEC supply-cutting deal even though the agreement’s original target is within sight,” reports Reuters.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, shot higher on that report. USO and BNO are up 8.8% and 10.4%, respectively, over the past month.
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 prompt more upside for oil this year.
Saudi Arabia Emerges as OPEC Supporter
“Over the past year, Saudi Arabia has emerged as OPEC’s leading supporter of measures to boost prices, a change from its more moderate stance in earlier years. Iran, once a keen OPEC price hawk, now wants lower prices than Saudi Arabia,” according to Reuters.
The cartel’s supply cut appears to be working because prices are rising at a time when U.S. oil put is reaching near record levels and continuing to rise. U.S. shale producers are likely to keep pumping at record levels as prices rise to exploit spreads between West Texas Intermediate and Brent prices.
Related: Oil Surge Stirs USO Options Activity
Advances in U.S. shale oil production technologies are contributing the to supply surplus and weighing on any oil price gains. It has become much cheaper for the upstart U.S. shale producers to extract oil out of the ground, sparking U.S. oil output to its highest levels since the 1970s.
“To be sure, OPEC and Saudi Arabia have no official price target and say the objective of the production cut is to balance supply and demand, and reduce the inventory glut,” reports Reuters. “But guidance on preferred price levels comes from officials speaking off the record, and from industry sources who have discussed the issue with Saudi officials.”
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