Crude oil has been on a tear, and this analyst thinks there's more upside to come

Reza/Getty ImagesA worker stands at a pipeline, watching a flare stack at the Saudi Aramco oil field complex facilities at Shaybah in the Rub’ al Khali desert in Shaybah, Saudi Arabia.
  • Crude oil prices have been on a tear in recent months, lifting 26% since mid-February.
  • The Commonwealth Bank says there may be more upside to come ahead of a potential IPO of Aramaco, Saudi Arabia’s state oil producer.
  • It thinks prices could top $80 a barrel in the next six months but doubts a price in excess of $100 will be achievable in 2019.

Crude oil prices have been on a tear this year, propelled by a combination of output curbs from OPEC and non-OPEC producers, firmer global economic growth and renewed geopolitical concerns in the Middle East.

Brent crude — the global benchmark — briefly hit $78 a barrel last week, extending its rally from mid-February to over 26%.

From the nadir of $27.10 a barrel struck in early 2016, Brent prices have surged by nearly 190%.

Commonwealth Bank

Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, thinks there may be more upside to come in the months ahead.

“Saudi Arabia’s IPO [initial public offering] of Aramco and the OPEC-led accord are the key positive drivers for oil prices,” says Dhar.

“Saudi Arabia are reportedly targeting crude oil prices near $80 a barrel in preparation for the IPO of Aramco. That also helps explain why Saudi Arabia is still pushing for supply-side discipline despite OPEC and allied producers already achieving their target to reduce OECD oil stockpiles to the five-year average.”

Saudi officials are contemplating floating up to 5% of Aramco, the nation’s state oil producer. Given higher crude prices will benefit its valuation, it helps explain recent actions from the world’s largest crude exporter.

While Dhar admits that elevated oil prices will incentivise increased US output, potentially capping further gains, he thinks pipeline constraints will likely limit any-near term response from US producers.

“Those constraints mean that oil prices could breach $80 a barrel over the next six months, particularly if OPEC production continues to remain underwhelming,” he says.

Although Dhar thinks there may be more upside to come for prices, he suggests higher US output should prevent oil prices from exceeding $100 a barrel in 2019.

Front-month Brent crude futures currently trade at $77.05 a barrel.

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