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Is Oil Set For A Correction?

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Last year at this time WTI (West Texas Intermediate) oil stood at $47.66 a barrel, while its international counterpart, Brent, chimed in at $50.46. By comparison, today, WTI is now $68.43 while Brent sits at $73.62. Rising $21 to $23 dollars in value inside a year is significant. Its implications for the global economy isn’t just limited to the rise in prices at the pumps, which according to the GasBuddy Live Ticking Average, puts gasoline at $2.82.5 a gallon and $1.34 a liter, or up 50 cents a gallon and 24 cents a liter respectively.

In the very week that U.S. oil production reached a new milestone of 10.6 million barrels a day, placing it now ahead of Saudi Arabia and just behind Russia’s 10.8 million barrels a day output, there is a growing concern that the sudden and dramatic increase in energy costs, coupled with its effects throughout the wider world economy, could see a pullback and correction. The signs appear to be growing in places not always well considered, such as Asian refineries. They are turning away from higher-priced Saudi oil blends in favor of more affordable, Colombian, Iranian, Brazilian, and Iraqi blends. On the financial front, the rapid rise in oil has triggered a growing concern over the re-emergence of inflation and talk of an energy super bubble which together could have the undesired effect of slowing both trade and global consumption.

Gas and diesel prices aside, the argument posited by OPEC regarding years of undercapitalization in new oil exploration and development, may have been slightly exaggerated given the abundance of alternative oil plays that are ready to fulfill demand and short of quotas and other economic challenges, such as the economic breakdown unfolding in Venezuela, whose oil output has virtually disintegrated threefold in the last decade.

Apart from strong speculative positions taken by investment banks and money managers, the summer of 2018 may well be the last period for supporting these higher oil prices until there is stronger evidence that, indeed, global oil supplies are in sync with demand. The overhang from years of oversupply by OPEC may still remain for the balance of the decade.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded tomorrowsgaspricetoday.com to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.