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Oil Prices Likely Headed Higher Despite Recent Plunge, Analysts Say

U.S. News & World Report logo U.S. News & World Report 11/23/2018 Alan Neuhauser

A nodding donkey panorama pumps crude up from the ground on an oil field.: Brent crude oil dropped to nearly $62 a barrel, down from nearly $86 last month and the lowest price since the spring.© (Pgiam/Getty Images) Brent crude oil dropped to nearly $62 a barrel, down from nearly $86 last month and the lowest price since the spring. Plummeting oil prices this week prompted fretting about a supply glut, but analysts project that rising demand and an impending supply shortage could spur a bounce-back that will send prices higher in the coming weeks and months.

Benchmark Brent crude oil dropped to nearly $62 a barrel, down from nearly $86 last month and the lowest price since the spring, when oil prices were still recovering from the $45 per barrel nadir struck in 2017.

The precipitous drop likely "overshot" such fundamentals as supply and demand that usually govern the markets, Goldman Sachs said in a report this week.

"While we expect prices to eventually recover, we continue to expect high price volatility until evidence that the oil market fundamentals are improving, requiring a decline in OPEC production and signs that demand growth is resilient," the report said.

Several factors spurred the recent reduction in prices: Oil producers and traders, expecting a drop-off in supply from the reimplementation of sanctions on Iran, were caught by surprise when the Trump administration abruptly grant exemptions to eight countries allowing them to continue importing oil from the Islamic republic.

Meanwhile, oil markets saw an unexpected spike in supply from second-tier producers such as Norway and the United Kingdom in the North Sea, as well as Mexico. Together with increased supply from Russia and Kazakhstan, which ramped up production in anticipation of the Iran sanctions, the countries put more than 800,000 barrels per day onto the market between August and October. Shale oil production in the U.S. rose through the same period.

"You had a bunch of people responding to the Iranian outage, and that just overwhelmed us," Steven Kopits, managing director of the consulting firm Princeton Energy Advisors,recently told U.S. News. "Some of it was bad timing, some of it was the response to the sanctions, and some of it was that the Trump administration chickened out and gave a bunch of Iran's best customers waivers."

While the recent drop in prices reflected potential concerns about a glut in the short term, however, the consulting firm Wood Mackenzie warned of a crunch over the long haul, one that could be felt as soon as the 2020s as discoveries of new oil deposits have failed to keep pace with expected growth in global demand.

"The warning signs are there – the industry isn't finding enough oil," the firm warned. "The problem is that the recent rate of commercial volumes found gives little confidence that there will be enough new discoveries to fill the gap."

Such a crunch may be alleviated by a slowdown in the global economy. Global markets have shown signs of a downturn, particularly in developing economies.

This week, Fatih Birol, Executive Director of the International Energy Agency, urged oil producers in an interview with Reuters to exercise common sense.

"The global economy is still going through a very difficult time and is very fragile and, as a result of the increase in production, we have very thin production capacity left in the world, in a world which is becoming more dangerous," Birol said.

Copyright 2017 U.S. News & World Report

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