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Crude oil above $60 won't continue as supply, demand will drag prices back to earth, John Kilduff says

Crude oil hit its highest level in more than three years to start 2018, but one market watcher expects these gains to be short-lived.

Crude oil blazed through the first few weeks of the year, as signs of a supply-demand balance set off commodities bulls. A rally sent oil prices nearly 6 percent higher for the year, to trade at their best since December 2014. Crude has surged 133 percent since hitting a multi-year low of $27.30 a barrel in February 2016.

However, market conditions do not currently support crude oil above $60 a barrel, says John Kilduff, partner at Again Capital and a veteran market watcher. He expects a pullback to more reasonable levels in the near-term.

"As we get into the new year now and another season of refinery maintenance and much lower gasoline demand, I see the base case fundamentally as arguing for lower prices from here at least for a while," Kilduff told CNBC's "Futures Now" this week.

High U.S. oil production could also put a dampener on the crude rally, added Kilduff, potentially negating the benefits of a deal among Organization of Petroleum Exporting Countries (OPEC) to restrict supply even further. That would effectively support prices.

The International Energy Agency (IEA) estimates that production growth in the U.S., Canada and Brazil would bump non-OPEC supply higher by 1.7 million barrels per day in 2018. U.S. crude supply alone could surpass 10 million barrels a day — beating out Saudi Arabia and Russia for the title of world's largest oil producer.

Kilduff sees a range of $50 to $55 a barrel as more appropriate for the current market. Crude oil last settled as low as $55 in November, and closed above $63 in Friday's trading.

In a silver lining for commodity traders, Kilduff does not see a return to the lows seen in 2015 and 2016, when prices cratered below $30. High production levels and weak demand for oil set off a crude selloff in late 2014 that stretched through to early 2016.

"We're certainly out of the woods that we were in 18 months ago or so when there was abject oversupply of crude oil and refined products," said Kilduff. "The global glut has been worked off to a large degree, in part because of the OPEC/non-OPEC agreement, but also because of other exogenous events that occurred."

OPEC members have largely complied with an output deal that has contributed to a correction of the global imbalance between supply and demand. A agreement to cut production went into effect at the beginning of 2017, and is set to expire at year's end after several extensions.

Two major pipeline outages, including the Keystone pipeline, and a string of devastating hurricanes in the latter half of 2017 helped to balance the domestic oil market. Those events temporarily limited U.S. production and created a sharp drawdown in domestic supplies.

Correction: The Keystone pipeline suffered a major outage last year.

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