Oil and Gas

Is the case for $50 oil heating up?

Oil finally rallies
Oil finally rallies

Fears of slowing oil demand, a global crude glut and Middle East woes spooked the market at the beginning of the year, but now, a change of heart could guide oil to $50, according to an RBC Capital Markets strategist.

"[The] market's psychology has changed," Helima Croft, RBC Capital Market's head of global commodities strategies, told CNBC's "Power Lunch" on Monday. "Everyone is thinking about now the recovery to $50," she said, adding that OPEC's freeze talk has influenced market sentiment.

International benchmark Brent went just slightly above $41 a barrel in intraday trading Monday before settling at $40.84, up more than 5 percent; West Texas Intermediate also rose more than 5 percent to settle at $37.90 on the day.

While $40 oil seemed farfetched to some just a month ago the case for $50 oil has been gaining momentum. A few weeks ago, Mike Wittner, head of U.S. commodities research at Societe Generale, told CNBC's "Closing Bell" that fundamentals support $40 oil, and that by year-end the market will see $50 oil.

The psychology behind the current boost in oil prices, according to Croft, is that OPEC producers have realized they need $50 oil, and are worried that lower oil prices would elicit further credit ratings downgrades and expedite austerity measures.

Oil workers moving a drill on a rig in Texas.
The new key level for crude oil

Still, Iran has made clear that it seeks to increase production given that sanctions have been removed, and the market's already seen shipments from Iran to Europe. In Croft's view, Iran is the only OPEC country that isn't concerned about a low-price environment.

"The only country in OPEC that I think year on year is going to have a better year is Iran," she noted. "Iran is set for 5 percent growth rates this year because of sanctions coming off; they're basically the only ones who could be like 'We don't really care about lower prices.'"

In the same vein, the EIA reported last week that U.S. crude inventories for the week of Feb. 26 increased by 10.4 million barrels. The agency added that "at 518.0 million barrels, U.S. crude oil inventories are at historically high levels for this time of year."

In addition, Croft told CNBC that her firm expects U.S. production to decrease 600,000 barrels year over year.

"The only place that can grow is probably going to be Iran," she said. "That gives us the comfort that we should be reaching $50 by the end of the year."