After a stretch of improvement, oil prices took a tumble last week. West Texas Intermediate crude prices fell 8% – the largest dip since last September.
But the drop doesn’t necessarily mean that a crash is coming, said Matt Smith, director of commodity research at ClipperData. It’s more likely that the market is just correcting itself after a strong rally in recent weeks.
“It’s more a reflection that the path to recovery is a little bumpy and markets don’t always move in a straight line,” Smith said. “We’ve discussed in recent months how oil prices have been getting ahead of themselves and pricing in this recovery before it’s actually here. And there’s also been this sort of rampant speculation in a lot of different assets really. And so I think last week’s violent move lower was the market essentially checking itself after a strong run higher.”
Even with the dip, though, Smith said it’s unlike that consumer gasoline prices will fall much in the coming weeks. That’s because gas prices rise seasonally, as demand picks up in the summertime.
“This year is going to be no different for two reasons. One is that there’s so much pent up demand given the pandemic over the last year. And then secondly, U.S. Gulf Coast refineries, you know, where nearly half of all U.S. refining activity is, they’re still not back up to full force after last month’s winter storm in Texas. And so the supply side of the picture is somewhat in check while demand is wound up like a coiled spring.”
One other factor that will likely keep prices high – OPEC. The organization’s member countries will likely be slow to ramp up output too much, in order to avoid tanking prices and hurting their economies.
“They’ve also had this hesitancy to put too much oil onto the market as demand recovers,” Smith said. “They’re essentially doing a juggling act where they’re trying to meet rising demands while not flooding the market. But all that said, Saudi Arabia definitely wants high prices from where it is now. It needs it to meet its budget. And the kingdom has seemingly learned its lessons from last year’s price war.”