Oil Prices Are Rising Again, But Will They Keep Going Up?

May 6, 2015

Oil prices hit a new high for the year Wednesday — closing at just under $61 a barrel. They’ve been rallying for a month, but nobody’s predicting $4-per-gallon gasoline anytime soon. And some analysts say weak demand will send oil prices down again.

The recent rise follows an historic drop in prices, which were as low as about $45 a barrel less than two months ago.

So to understand what’s going on now, let’s look at what sent prices tumbling in the first place

“I think prices were pushed down by a realization on the part of Saudi Arabia,” says Philip Verleger, an economist and consultant who has been watching the oil market for more than 40 years. He says he’s never seen what he’s seeing now.

And he says Saudi Arabia could see it too, and it decided to let oil prices crash. “What the Saudis could see was new forms of renewable energy consumption — windmills, tidal power, solar power and the Tesla,” Verleger says.

He says in the longer term, electric cars and those other technologies could mean less demand for oil. Shorter term, the global economy has slowed and that means less thirst for oil right now. At the same time, with fracking the U.S. is now rivaling Saudi Arabia as an oil superpower.

“This rapid technological change in oil supply that hadn’t been predicted, with fracking in the United States, [was] threatening to displace their production,” Verleger says.

So he says the Saudis now want cheaper oil, in part to slow down the fracking revolution in the U.S. — and to signal to the developing world: Don’t worry — you don’t need to invest in alternative energy. You can buy cheap oil from us.

“They want to be the Wal-Mart of oil,” Verleger says, “the low-cost supplier.”

So what’s pushing prices higher now? For one thing, cheaper oil prices have stunted fracking — or at least new drilling in the U.S.

Hillary Stevenson is an oil analyst at Genscape, which tracks oil production. She says that since the price crash, there are a lot fewer drilling rigs punching holes in the ground. “Since then, 982 oil rigs have been cut for a 57 percent drop,” she says.

Still, most of the fracking wells that were already there are still pumping oil. So Stevenson says there is still a tremendous supply glut. That’s why she and many other analysts don’t see how this latest price increase can last.

“The fundamentals do not point to the level of price increase that we’ve seen recently in the market,” Stevenson says.

Verleger says he expects to see prices back down around $50 by the end of the year. Of course nobody really knows where the price of oil is headed. But if Verleger is right, that probably means gasoline prices this summer will be about a dollar cheaper than last year.

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