The overall trajectory for oil prices remains upward, despite taking a breather today. I still see prices reaching $65-68 for West Texas Intermediate (WTI, the benchmark traded on the NYMEX) and $73-78 for Dated Brent (the other major benchmark set daily in London).
But this is hardly going to be a straight, linear rise. Rather, it’s going to occur in what I call a “ratcheting” pattern: occasionally jerking downward along the way.
One of the primary concerns causing some of the sudden drops in oil prices is the impact of excess production.
The traditional belief has been that downward prices discourage forward commitments of capital expenditures, thereby reducing supply and more closely associating prices with demand.
Operating companies have been slashing the financing of new wells, and the number of rigs in the field are now down to levels not seen since the credit crunch. So we should have seen a corresponding drop in production.
That’s not what happened.
Just take a look at this chart…