Crude Oil Price Forecast: Mission Accomplished?

April 15, 2018 — 9:10 AM EDT

In a dramatic U-Turn, oil prices reached the highest level since December 2014 last week as rising tension in the Middle East made traders nervous. Over the weekend, President Trump made good on this threat to use force to punish Syria's president Bashar al-Assad for an alleged chemical attack on civilians in the Damascus suburb of Douma. U.S., British and French forces struck Syria with more than 100 missiles.

The threat of conflict sent oil prices above the year's previous high point of $66.66 per barrel, closing at $67.33 per barrel on Friday after trading as high at $67.75 per barrel earlier in the day. The run-up in prices was aided by reports that Saudi Arabia's air defense forces intercepted three ballistic missiles fired at Riyadh and other cities on Wednesday by Yemen's Houthi rebels.

The market will be heavily influenced by short-term geopolitical news next week with expectations that oil prices could rise again. Traders will be eagerly awaiting how Russia, Syria's main ally and supporter, will react to the missile attack. Russia's reaction has been muted so far, but the country has promised "consequences."

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Fundamentals Dominate Away From the Noise

In the meantime, traders and investors are analyzing the fundamental market backdrop away from the immediate market volatility. Last week, the International Energy Agency (IEA) published a report in which it claims that OPEC and its partners' push to clear the global oil supply glut is nearly complete. According to the IEA, the overall state of the cuts in March shows OPEC's compliance rate at 163%, with its non-OPEC partners achieving a rate of 90%. The report concludes with the IEA commenting about the oil supply overhang by saying, "It is not for us to declare on behalf of the Vienna agreement countries that it is 'mission accomplished,' but if our outlook is accurate, it certainly looks very much like it."

Adding to oil's positive price picture is news that Saudi Arabia wants oil near $80 to pay for its government's ambitious policy agenda and support the valuation of state energy giant Aramco before a much anticipated initial public offering (IPO). Recently, Saudi has said that the IPO could come as soon as this year, but it is willing to wait until 2019 if market conditions are not right. This means that the Kingdom has a medium- to long-term commitment to higher oil prices.

Oil Companies Valuation Dislocation

As we move into earnings season, analysts and investors alike are struggling to understand why oil company share prices are underperforming in a rising oil price environment. Oil sector-related ETFs have underperformed this year despite a rising oil price. For example, the Energy Select Sector SPDR ETF (XLE) is down 1.2% year to date in 2018, while the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is up just 0.5% in the same period. This poor performance stands in stark contrast to oil, which is up 11.5% year to date.

This week, Schlumberger Limited (SLB) and Baker Hughes, a GE Company (BHGE) kick off the energy sector's earnings season, with both companies issuing their 1Q18 earnings on Friday. Analysts will be pouring over the results for signs of improving financial performance. Consensus forecasts from Thomson Reuters and Factset show analysts expect Schlumberger to grow sales by 13.4% year over year, with EBITDA rising by 11.7% in the same period. They are also expecting earnings per share (EPS) to increase to $0.37 in 1Q18 from $0.20 in 1Q17. If results are disappointing, it could be a bad sign for other companies that are due to report first quarter results later this month.

Technicals Look Strong but Could be Deceptive

Oil had an incredibly strong week, with prices moving 8.6% over the course of five trading days and breaking the previous year's high of $66.66 per barrel as geopolitics pushed prices higher. On a daily chart, all technical and moving average indicators point to a buy. The weekly price chart is equally bullish, with all indicators suggesting higher prices. Some stochastic indicators propose that oil may be overbought at these levels, however, and imply that higher volatility should be expected next week as markets adjust.

Technical chart showing the price performance of crude oil

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as trading or investment advice. Gary does not own XLE, XOP, SLB or BHI.