Oil prices could see a spike from a coming supply-demand imbalance, expert predicts

Major supply-demand imbalance for oil could spike prices, says energy expert

After cruising to four-year highs earlier this year, crude oil has hit the skids.

Since hitting $70 a barrel for the first time since 2014 in May, prices have been range-bound, but it could soon snap out of that range, according to energy expert Robert Raymond.

"We've sort of achieved [a recovery to the $70] level probably a little faster than we thought we would have relative to declines in Venezuela and Mexico and parts of China and so the production side of the equation has actually rolled over a little faster than we thought it would," Raymond, investment strategist at hedge fund RCH Energy, told CNBC's "Futures Now" on Thursday.

Global inventories have since drawn down to border on "critical levels" as demand remains robust, explained Raymond.

The Organization of Petroleum Exporting Countries' (OPEC) spare capacity, which measures their bandwidth to ramp up production to cushion price fluctuations, is below 3 percent of total global demand. Lower spare production levels restricts how able OPEC is to respond to spiking prices.

Oil companies' re-investment and capital expenditure levels are also signaling a potential squeeze in supplies, he adds.

"The industry, for the last three years, has been chronically underinvesting and continues to do so at a rate of only 60 percent of cash flow being reinvested in the form of capex," explained Raymond. "The last time that happened [was] in 2004 and '05 which precipitated a spike to $147 a barrel."

Oil producers tightened their belts during crude oil's sell-offs in 2014 and 2015, in an attempt to minimize losses. Exxon Mobil, for instance, reduced its exploration expenses in 2014 by 15 percent and by another 9 percent in 2015.

Crude oil's next move also depends on how things shake out in the Trump administration's trade disputes, the analyst said. 

"As we get more clarity on what happens with global demand, and to some degree that's sort of tariff related right out of Washington, I think that ultimately is the tell in terms of which way we go here," he said.

"If some of this gets resolved in a relatively amicable or healthy way then the global demand curve holds together, then I think we have a real risk as we head into 2019 and beyond of materially higher prices," he added.

Oil demand growth is expected to rise by 1.64 million barrels a day to 98.83 million barrels a day this year, according to OPEC estimates. It should rise again to reach 100.26 million barrels a day in 2019.

Global spare oil capacity is bordering on critical levels, says energy expert
Next Article
Key Points
  • Saudi Arabia's oil production jumped by nearly 500,000 barrels per day in June as it aims to put more supply into the market to tame the cost of crude.
  • Output from OPEC was up 173,000 bpd as the 15-member producer group prepares to lift production caps in place since 2017.
  • OPEC forecast that global oil demand will cross 100 million bpd for the first time in 2019, but warned trade tensions could negatively impact the market.