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Economic Forecasts

Will OPEC Cuts Bring Higher Oil Prices?

Kiplinger's latest forecast on the direction of energy prices

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If you were hoping for calmer oil markets to start 2017, you’re out of luck. Although the price of benchmark West Texas Intermediate crude is about where it started the year, practically every trading day has seen significant volatility.

WTI started this week with a big tumble on rumors that OPEC might not be living up to its pledge from last autumn to make significant crude output cuts intended to push prices higher. What’s more, the Department of Energy announced that it intends to sell up to 8 million barrels of oil held in its Strategic Petroleum Reserve to help pay for maintenance to the SPR’s aging network of pipes and underground storage facilities. Both developments are bearish for an oil market that has been weighed down by too much supply in recent years.

Via E-mail: Energy Alerts from Kiplinger

We expect oil prices to remain jumpy but to trade from $50 to $55 per barrel for most of this winter. OPEC probably will cut at least some production, which should help bring global supply and demand into better balance. But even as OPEC cuts back, U.S. production is likely to rise as energy firms drill more wells. Oil field services provider Baker Hughes reports that the number of rigs drilling for oil in the U.S. has jumped in recent months. So the glut of oil held in storage worldwide might not shrink as rapidly as OPEC had hoped.

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Gasoline prices will probably grind higher, continuing a trend that began last autumn. At $2.37 per gallon, the national average price of regular unleaded rose about three cents from a week ago and figures to near $2.50 per gallon soon, unless oil prices take a sudden tumble. Diesel, averaging $2.53 per gallon, also is likely to creep at least a few pennies higher.

Cold weather over much of the U.S. hasn’t ignited a rally in natural gas prices, despite heavy demand for the heating fuel. Markets are looking past the current frigid conditions to forecasts calling for a milder trend later this week. That suggests that gas demand should ease soon and explains why the benchmark gas futures contract has slipped to $3.12 per million British thermal units. Barring another bout of extreme cold, we expect gas futures to mostly trade from $3.25 to $3.50 per MMBtu.

Source: Department of Energy, Price Statistics