Oil Prices: Drivers Could Soon Be Paying a Lot More at the Pump

Oil Prices COil Prices Could Hit Dollar 50 by the Summerould Hit $50 by the Summer

Drivers could soon be paying more at the pump. At least that’s what analysts at Credit Suisse believe. According to the investment bank, oil prices could rally to as much as $50.00 a barrel by the end of May.

Credit Suisse analysts justify their bullish predictions simply because there is a perception that oil demand is going up worldwide. After rallying about 50% in February and March, the momentum in oil prices has swung back towards higher prices. (Source: “Credit Suisse: The Death of Oil Demand has been Greatly Exaggerated,” Bloomberg, March 28, 2016.)

The continued oversupply and rising inventories continue to weigh on oil prices, but there has been a drop in production, which has raised optimism. The other bullish factor is that Fed Chair Janet Yellen has not raised interest rates. This has kept the U.S. dollar from rising further compared to other key currencies like the euro, Chinese yuan, and Japanese yen.

A relatively lower dollar, moreover, is good for emerging markets, which can expect greater oil demand, supporting an increase in oil prices. Many analysts now believe that the market and the price of oil could reach a balance in 2016, with particular focus on the second half of the year.

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The main unknown factor that will continue to affect the price of oil will be the pace of growth in demand for oil worldwide. The interest rate hike delay for the dollar has certainly contributed. However, if the economic slowdown in China exacerbates, it could grind any expectation of $50.00 oil over the next three months.

Still, Credit Suisse is optimistic. It has proverbially flipped the bird to oil market analysts and traders, who remain pessimistic. Global oil demand dropped by an annualized 1.2% in the fourth quarter of 2015. The same demand dropped two percent in the same quarter of 2014, when oil prices were almost three times higher than now. (Source: Ibid.) Evidently, Credit Suisse can proffer its bullish oil price prospects because it maintains a favorable outlook for the world economy in general.

Credit Suisse sees the concerns about an economic slowdown, especially last January and February, as overblown. It suggests the slump was temporary. Oil demand is receiving support from the U.S. recovery and Europe and a strengthening of growth trends in emerging markets.

Credit Suisse’s forecast for oil prices exists in stark contrast to the views of other analysts, who see the price of oil falling back below $30.00 a barrel in the near term. U.S. crude prices gave up gains this week after reports of another oil inventory buildup. (Source: “Oil inventories spook investors, WTI ends at $38.32,” CNBC, March 30, 2016.)

Moreover, in the next few months, the new UN-approved Libyan government of Prime Minister Fayez Farraj could make inroads in stabilizing the country. This would certainly allow oil production to resume levels not seen since six years ago, when Gaddafi was still in power. The odds of Farraj succeeding in absorbing multiple claims to power from tribal and internationally backed militias and interests might only be visible under a microscope.

The unknowns are, to quote former Secretary of Defense Donald Rumsfeld, of the “unknown” variety. There are no easy solutions in Libya. Still, everything that could have gone badly, has gone even worse. On that basis alone, Farraj deserves a chance. But stability for Libya and the higher oil production that will result from it will only serve to boost inventory.

This will keep the pressure on oil prices from reaching Credit Suisse’s bullish prices in 2016. Still, Libya could erupt in full-scale civil war as well, cutting what oil it can still produce. That would certainly shift the trend in favor of $50.00-per-barrel oil in May.

Drivers could be paying a lot more at the pump.