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Oil price rally will continue into the next two quarters despite dip, experts say

Key Points
  • Oil prices slipped Wednesday, interrupting a recent rally with news of sharply increased U.S. crude stockpiles.
  • But it's a temporary blip in the broader outlook for the next two quarters of price growth, commodities experts told CNBC.
  • The price of international benchmark Brent Crude is up 24 percent year to date while West Texas Intermediate is up 27 percent.
Workers extracting oil from oil wells in the Permian Basin in Midland, Texas on May 1, 2018.
Benjamin Lowy | Getty Images

Oil prices slipped Wednesday morning, interrupting a recent rally with news of sharply increased U.S. crude stockpiles released by the American Petroleum Institute Tuesday night.

But it's a temporary blip in the broader outlook for the next two quarters of price growth, commodities experts told CNBC.

"We expect the rally in Brent prices will continue over Q2-Q3 this year as the market tightens further on the back of OPEC production cuts and deteriorating output in Venezuela," Edward Bell, director of commodities research at Dubai-based Emirates NBD, told CNBC in an email Wednesday.

Robin Mills, CEO of Qamar Energy and a nonresident fellow at Columbia's Center for Global Energy Policy, similarly sees prices remaining strong in the second quarter.

"Demand continues to be fairly good, OPEC+ compliance is high, the production cuts deal is planned to continue, output in Venezuela will keep deteriorating and Iranian exports are still under pressure," he told CNBC, noting that Russian compliance with the output cut deal is also increasing.

"If prices go 'too high', likely the U.S. will grant more Iran waivers, and if they don't then, with a lag, the Saudis will respond by increasing production within their overall cap."

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International oil benchmark Brent Crude dipped 0.25 percent on Wednesday, trading at $67.80 a barrel at 11:22 a.m. London time. U.S. benchmark West Texas Intermediate was down 0.62 percent at the same time, trading at $59.57, after the API report revealed an inventory jump of 1.9 million barrels for the week ending March 22, obliterating market expectations for a drop of 1.2 million barrels.

Still, as Bell and Mills pointed out, prices are gradually rising year-to-date on the back of OPEC cut pledges coming to fruition and a worsening picture in conflict-ridden Venezuela, where the second power outage in a month has halted crude shipments coming out of the country's main oil port.

The price of international benchmark Brent Crude is up 24 percent year to date while West Texas Intermediate is up 27 percent in the same timeframe.

In the nearer term, inventory figures from both the U.S. and OPEC member states will continue to shape market sentiment, particularly as traders watch for the decline in U.S. rig counts since November to take effect.

Downward pressures by the end of the year

Conflicting forces of tightening global supply versus concerns over world demand have kept Brent crude in a narrow range over the course of March, trading within the window of roughly $64 to $68 per barrel.

Despite these supportive conditions, however, Bell expects prices to come down by the end of 2019.

"By the end of the year though we expect prices will slip from their current levels as OPEC production increases as member nations chase the market share ceded by declining production in Venezuela and other producers."

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And on the physical trading side, many executives at major oil companies aren't excessively bullish.

Shell's head of crude oil trading Mark Quartermain told the Financial Times on Tuesday that he saw the market staying in a range of $65 to $70 a barrel, while Ben Lockock, the co-head of oil for commodities trader Trafigura, told the paper he was only "gently bullish."

Analysts also point to the major unknown that is the direction of the U.S.-China trade war. Any failure in upcoming negotiations could trigger a sharp downturn in business sentiment and demand, particularly from an already-slowing China.

Talks will recommence in Beijing on Thursday. And while both sides are eager for a solution, U.S. President Donald Trump has already seemingly tempered expectations, saying last week that tariffs could remain "for a substantial period" and could more than double if the world's two largest economies don't manage to reach a deal.