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Oil's recent price surge won't last, economists predict

Key Points
  • Oil prices have risen around 40% since their trough in December 2018.
  • The U.S. recently withdrew sanction waivers on Iranian crude oil exports.
Workers cross walkways between zones aboard an offshore oil platform in the Persian Gulf's Salman Oil Field, operated by the National Iranian Offshore Oil Co., near Lavan island, Iran, on Thursday, Jan. 5. 2017.
Ali Mohammadi | Bloomberg | Getty Images

Sluggish global growth and an increase in U.S. output both signal the end of the recent rally in oil prices, economic research consultancy Capital Economics has suggested.

The price of oil has surged since the turn of 2019, owing to voluntary output cuts by OPEC and its allies, along with U.S. oil sanctions on Venezuela and Iran. But an analyst note Friday said the subsequent rise in the S&P GSCI Energy Index — just one benchmark for the energy commodity market — will fall away in the coming months as sluggish economic growth weighs on oil demand and prices.

The note, entitled "Calling time on the oil price rally," from Chief Commodities Economist Caroline Bain and her team predicted that prices would fall as supply fears begin to fade.

The consultancy recently revised up its end-2019 forecast for the price of Brent from $50 to $60 a barrel, in part owing to the President Donald Trump administration's withdrawal of sanction waivers on Iran's crude exports.

"But we expect rising U.S. output and a gradual return of some OPEC supply, combined with greater investor risk aversion, to drag down prices," the note stated.

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Looking even further ahead, Capital Economics does not expect supply to be as constrained in 2020-2021, but does think oil prices will rise "owing in large part to a more dovish (Federal Reserve) and a decline in global risk aversion."

This was somewhat echoed in a note Friday from J. Safra Sarasin International Economist Raphael Olszyna-Marzys.

Crude oil prices have risen by around 40% since their December trough, but Olszyna-Marzys said fears of tight supply conditions "look overdone."

OPEC and Russia's readily available spare capacity to meet cuts in Iranian oil exports should maintain short-term balance in the oil markets, he suggested, but the Trump administration's aggressive stance against Iran "runs the risk of aggravating tensions in the Middle East."

"And if global commodity demand remains robust, as we expect, further unplanned outages could stress the supply side of the market," Olszyna-Marzys said.

While an escalation of tensions between the U.S. and Iran may drive up prices, however, he does not see Iran's threat to shut down the Strait of Hormuz, a critical global oil passageway, as credible, due to its geopolitical costs being "prohibitively high."

"Still, if our view of a global recovery in the latter part of the year is correct, prices are likely to go somewhat higher," he concluded.

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