Trends Suggest Upward Price Pressure

Friday brought a big downturn in prices, following Saudi Arabia’s commitment to fill in for lost Iranian production. In addition, Europe, Russia, and China are all working with Iran to continue the deal without the U.S., keeping Iranian oil on the market. Crude prices this morning are trading in line with Friday’s closing price, moving just 11 cents to trade at $70.82.

Fuel prices managed to limit their losses last week. Diesel prices remained nearly unchanged on Friday, and this morning are trending just slightly higher, up 0.7 cents at $2.2289. Gasoline prices also avoided crude’s sell-off, trading flat on Friday and just slightly higher this morning. Gasoline prices are currently $2.1913, up 0.3 cents.

Prices trended lower on Friday as traders engaged in profit-taking following a historic rise in prices. Although prices fell a bit lower on Friday, the overall risk perception in the market is that prices will shoot higher – that’s why Goldman Sachs has set a summer price target of $82.50 Brent crude ($5 above current levels). Other banks have argued prices could go even higher.

The forward curve continues to show steep backwardation – meaning that future prices are estimated to be lower than current (prompt month) prices. While this would seem to mean that prices will fall in the future, backwardation is actually bullish for prices. Backwardation tells suppliers to sell inventories now, and refill them in the future when prices fall. It also incentivizes oil producers to invest in short-term production rather than long-term production.  When prices were trading at $30-40/bbl, the forward curve showed contango – that is, future prices were higher than prompt month prices. Once prices began rising above $50, the forward curve flipped to backwardation, and prices have been soaring since then. As long as the forward curve continues to show backwardation, market pressure will keep oil prices elevated.