Crude oil futures enjoyed an extended rally after a government inventory report, released Wednesday, showed that U.S. petroleum product inventories dropped unexpectedly. The news, which helped push oil prices up around the $71-a-barrel mark, was surprising because it followed a step-up in refinery activity. With futures around a 10-month high, CNBC.com talked to John Kilduff, a senior vice president at Man Financial, about his views on the oil market. Here's what he had to say:
Where do you think oil prices will end the year?
I expect crude oil prices to end the year near $60 per barrel, possibly in the upper $50s. At year-end, we are well into the winter heating season, and, in fact, the market begins looking toward the spring and concentrating on gasoline issues. In terms of supply concerns, December represents the trough for the level of concern.
I expect the refining industry to meet winter fuel demand, and the evidence of that should weigh on energy prices come December. If there is a disappointing holiday shopping season, or other economic concerns, it should contribute to lower prices by year-end.
What will the year's high and low be? And When?
I expect oil prices to peak near $83 barrel, during the August–September time frame. I expect refining issues to continue to bedevil the market, geopolitical concerns to emerge, and at least one storm should make a track for the Gulf of Mexico that will foster a surge. Traditionally, energy experiences a seasonal rally during this time period that should also enable a new record high for crude.
Given the state of the refining industry, what is your expectation for gasoline prices? Heating oil?
I expect heating to be particularly strong, especially during August-September. Just as pre-season supply worries pervaded sentiment surrounding gasoline, heating oil should experience a similar effect. Also, heating oil inventories are at record low levels, which is a concern. I expect heating oil prices on the NYMEX to set a new record upward of $2.30 per gallon.
Gasoline prices will likely trade back up near their recent record of $2.40 per gallon.
Lower prices for both should ensue during the fourth quarter.
Do you think refining issues are temporary or will be ongoing?
I expect refinery issues to be ongoing. The industry appears to be experiencing great difficulty in managing the sulfur reduction mandates for Ultra Low Sulfur Diesel and lower sulfur gasoline. The agedness of the plant and equipment is also a contributing factor.
Where do you see natural gas prices heading? What are your estimates for high and low prices for the year?
Natural gas prices should continue to head lower in the near term, possibly testing the $5 level, which would represent the low for the year. Later in the year, natural gas prices will likely trade higher, back over $8.00. This expected rally should produce the highs for the year, approaching $9.00.
What do you see as the big issues in the energy market for the rest of the year?
Besides geopolitical factors and weather – storms, heat, and cold – I believe the global economy is the big issue for the energy. If the economy slows, it could produce a much needed demand break, which would enable prices to fall into the low $50s. This does not appear likely, however, as evidenced by the rising interest environment and the indefatigable consumer.
What is the biggest concern in the world right now in terms of supply?
In terms of real supply worries, it is Nigeria, which continues to have 700,000 barrels of crude oil off-line. While the new President has made some efforts to quell the situation in the Delta region, this effort, just as those in the past, will likely fail to placate the separatists.
Iran is a close second. The recently imposed gasoline ration scheme is not popular. This restiveness coupled with the potential for added sanctions leaves the door open, in my view, for Iran to act out and threaten or undermine supplies of its own or neighboring countries. An unintended skirmish with U.S. or U.K. forces in the Persian Gulf could also occur at any time.
John Kilduff, a contributor to CNBC, is a senior vice president at Man Financial.