The unloved commodity is poised for a big rally in the second half of the year, as the market finally starts to make a dent in supplies, according to UBS commodity analyst Giovanni Staunovo, Market Watch reported.
Staunovo’s view is that West Texas Intermediate crude oil CLQ7, +1.20% could rise to $58 a barrel before the end of the year, while Brent LCOU7, +1.09% is seen jumping to $60. That implies surges of 25% and 22%, respectively.
“Obviously at the moment, that looks far away. But, for me, the market has become too negative,” he said. WTI traded at $46.40 a barrel on Wednesday, while Brent was at $49.03, both sliding more than 1% after Russia ruled out further production cuts.
“My main view is based on [a forecast] that supply growth will lag behind demand growth in the third quarter and that we should see large inventory declines,” Staunovo said. “Historically we have seen a negative correlation between inventory dynamics and price dynamics.”
That means that when inventories go down, prices usually go up. Overproduction in the oil market has led to persistently high inventories in recent years, keeping a lid on prices, which haven’t topped the $60 level in two years.
To combat the supply issue, the Organization of the Petroleum Exporting Countries and a group of non-cartel members have agreed to cut production by 1.8 million barrels a day until the end of the first quarter of 2018. The group is committed to bringing global oil inventories to the five-year average, with the Saudi Arabian and Russian oil ministers pledging to do “whatever it takes” to balance the market.