Crude Oil Prices Forecast: Converging Supply Risks

May 19, 2018 — 9:10 AM EDT

Oil posted another set of substantial gains this week, closing at $71.38 per barrel on Friday to reach the highest price since 2014. Oil prices continue to move up on concerns about supply disruptions from OPEC's producers Iran and Venezuela. U.S. President Trump decided to reintroduce economic sanctions against Iran that could severely affect that country's oil exports, and Venezuela's crude oil production is in perpetual decline.

Chart showing Venezuela crude oil production

In response to rising oil price, Wall Street analysts have been tripping over themselves to update their price forecasts. For example, Morgan Stanley revised its Brent oil price expectation to $90 per barrel by 2020, up from $65 per barrel previously. Jefferies, another investment bank, says there is a real possibility that oil could reach $100 per barrel without specifying a timeline.

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Gasoline Prices Approaching $3 per Gallon

Rising oil prices translate into higher gasoline prices at the pump. The Energy Information Agency (EIA) says that, for the April through September 2018 summer driving season, it expects U.S. regular gasoline retail prices to average $2.90/gallon (gal), 17 cents/gal higher than last month's forecast and up from an average of $2.41/gal last summer. Peak summer demand unofficially begins during the Memorial Day holiday at the end of May. The EIA forecasts monthly average gasoline prices to reach a summer peak of $2.97/gal in June before falling to $2.86/gal in September.

Where Do We Go from Here?

Analysts' opinion seems evenly split on what could happen next. For example, some experts say that the European Union (EU) is unlikely to follow the U.S. lead to reimpose sanctions on Iran and that this means the overall impact on Iranian oil exports will be small. Others say that U.S. penalties for sanctions busting can be harsh and that even foreign companies will think twice before doing business in Iran.

For example, Danish shipping giant Maersk said that it would wind down operations in Iran by November to avoid U.S. sanctions. France's oil company Total S.A. (TOT) said in a press release last week that it plans to stop investing in Iran. The company says it cannot afford exposure to any secondary sanctions, which might include the loss of financing in dollars by U.S. banks for its worldwide operations. Iran could struggle to maintain the investment and technology required to increase oil production if other oil companies follow Total's lead.

IEA Cuts 2018 Oil Demand Forecast

Rising oil prices will negatively affect demand for crude oil, according to the IEA. In its latest monthly oil market report, the energy watchdog revised down its change in global demand expectations to 1.4 million barrels per day (mbpd) in 2018 from 1.5 mbpd last month, citing rising oil prices as the reason. At the same time, the agency says that 2018 non-OPEC supplies will increase by 1.87 mbpd, up from 1.8 mbpd previously, as shale oil producers respond to rising prices. These diverging supply/demand expectations should be bearish for oil prices in the medium to long term. So far, however, there is no sign of a return to the 2014 supply glut that drove prices lower.

Technical Picture Remains Bullish

Technical indicators for oil all point to higher prices. Short- and long-term moving averages also indicated that prices are in a solid uptrend. Oil prices have moved up enough that it is worth looking at a monthly chart to get a sense of potential resistance levels. A critical resistance level will break if oil finishes the month over $70 per barrel. Drawing a Fibonacci retracement from the highs of August 2013 to the lows of February 2016 shows that a close this month above $70 will break the 50% retracement of that previous down move.

The next monthly price resistance sits just under $80 per barrel at the 61.8% retracement. A monthly close above that level opens the possibility for oil to move toward the $90 to $100 range, in line with current Wall Street consensus price forecasts.

Chart showing the performance of crude oil prices

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 investment or trading advice.