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Whispers of $80 Oil Are Growing Louder

The Wall Street Journal. logo The Wall Street Journal. 1/10/2018 Alison Sider

Oil prices have been grinding higher and higher, spurring forecasters to predict they could hit $80 a barrel this year.

Oil is already trading at its highest levels in three years after a 22% gain for U.S. crude futures over the past 12 months, and some market watchers expect prices to take out new milestones as the rally continues in 2018.

On Wednesday, U.S. crude futures rose 0.97% to $63.57 a barrel and Brent, the global benchmark, was up 0.55% at $69.20 a barrel.

Byron Wien, vice chairman of the Private Wealth Solutions group at Blackstone, put $80 West Texas Intermediate on his annual list of 10 surprises in store for markets this year.

“Demand is going to continue to increase faster than supply,” he said in an interview. “It’s out of consensus, but people are underestimating the expanding middle class in the developing world and their resultant demand.”

Shrinking inventories, commitment by the Organization of the Petroleum Exporting Countries to cut output through the year, and only modest production growth from outside the group could all also push prices higher, he said.

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Production cuts by OPEC and other major producers and unexpectedly strong demand were a potent mix last year, helping pull prices out of a three year downturn.

Citigroup also said $80 is a possibility. In a note Tuesday, the bank said the right combination of geopolitical crises could tip crude prices into the $70 to $80 range. With supplies already so tight, any unexpected disruption could cause prices to surge.

Much of last year was relatively calm in the oil world, with unexpected interruptions reducing supplies by about 2 million barrels a day at the end of last year—half the 2016 peak. But there are looming risks to production in Iran, Iraq, Libya, Nigeria, and Venezuela.

“After hitting a 5-year low in September 2017, global oil supply disruptions could materially increase in 2018” and and in particular from OPEC countries, the Citi analysts said.

Still, others remain skeptical. Analysts at Commerzbank said Wednesday that market participants are ignoring the risks of an onslaught of new production from U.S. shale—something that looks increasingly likely at these high prices.

“Selective perception is the reason why the market is completely ignoring this just now. Attention is paid only to news that tallies with the picture of rising prices,” the analysts wrote.

Citi also cautioned in a separate note last week that high prices might not last.

“Higher oil prices (WTI>$60, Brent>$65) now will lead to a correction later in the year,” analysts wrote.

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