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Watch out, US crude prices could correct 35%: Analyst

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The price of U.S. crude may have caught up with North Sea Brent oil prices in the past week, but now looks overvalued and faces a sharp pull back of up to 35 percent, says one analyst.

West Texas Intermediate (WTI) has risen about 16 percent this year to 16-month highs last week on strong demand from refiners, optimism about the U.S. economy and efforts to drain a supply glut at the WTI storage hub of Cushing, Oklahoma. Brent crude has declined 3 percent this year, by comparison.

WTI traded at about $107 a barrel at mid-afternoon in Asia on Tuesday, while Brent was at $108.38. It briefly traded at a premium to Brent on Friday for the first time in almost three years.

David Lennox, resource analyst at Australian trading firm Fat Prophets, said the price of WTI is set to correct by as much as 35 percent from current levels by the end of the year as investors realize that U.S. demand levels are not as strong as originally thought.

"The WTI price should be south of where it is now," he said. "We think it should be around $70 to $95, so we are in line for a reasonable correction by the end of the year if demand continues to be muted."

"Certainly if we saw things calm down in the Middle East that could be a further downward trigger, or if U.S. demand turns out to not be as strong as the current WTI price is making it seem," he added. Political turbulence in Egypt has helped boost oil prices in recent weeks.

(Read More: Don't mess with West Texas: US oil to keep outpacing Brent)

Steep falls ahead?

U.S. crude has traded at a discount to Brent over the past few years, though from 2000 to 2010, WTI traded at a premium to Brent.

The recent sharp rise in WTI prices, which has narrowed the gap with Brent crude by more than $20 a barrel over the past five months, has taken many analysts by surprise and some warn of a potential 'flash-crash' in U.S. oil prices.

(Read More: Four-week rally in US crude rekindles 'flash crash' fears)

"We will see a very sharp and rapid movement [correction], and we will be going short as we think WTI is overvalued at these levels... we could see moves of 5-10 percent, [in the short-term,]" said Andrew Su, chief executive officer at Compass Global Markets.

Su said the correction was likely to extend further out, with WTI prices likely to fall almost 16 percent to about $90 per barrel in the fourth quarter, and almost 30 percent in total over the next 12 months to $75 per barrel.

"This move will coincide with a sharp correction in the U.S. equity markets that will be likely within the next month and precipitated by data out of China that indicates a greater than expected slowing of the economy there," he added.

(Read More: Here's where high oil prices could really pinch)

China is the world's largest oil importer, according to the U.S. Energy Information Administration (EIA), and any slowdown in its economy is expected to lead to reduced demand for oil imports.

A booming global shale gas industry also threatens to dent demand for U.S. crude in the long term, analysts said.

(Read More: Underground economy: How shale is 'fracking' the old order)

"In September 2007 we had a similar situation where we couldn't really pick out who was the main buyer but we had these rallies in the [WTI] market," said Jonathan Barratt, CEO of commodities research website BarrattsBulletin.com.

"We don't know who the buyer is but in the absence of them continuing, the market is technically very long, and that [chance of a] 'flash crash' becomes quite true if the fundamental picture doesn't come round quickly," he said.

- By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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