November Industry Affairs

Oil Prices Hit Two-Year High, Fueled by Expansive Global Growth; Crude inventories fall as economic growth boosts demand for fuel

The Wall Street Journal Online

Alison Sider

3 November 2017

Copyright 2017 Dow Jones & Company, Inc. All Rights Reserved.

Oil prices have reached their highest level in more than two years as global economic growth helps boost demand for the extra oil and fuel that has weighed on the market.

Economies around the world are expanding simultaneously for the first time in a decade. Industrial activity is picking up, increasing the need for diesel. More vessels laden with goods are crossing oceans, consuming bunker fuel. Falling unemployment means commuters are filling up tanks to head to work. All are signs of growing petroleum demand.

"We've seen global growth clearly much stronger than we would have expected 12 months ago," said Jason Thomas, director of research at the Carlyle Group. "It's not just faster growth, it's faster growth in areas that happen to be oil consuming," like trade and industrial activity, he said.

Oil prices have gained more than 15% since the beginning of September—their best two months in over a year. On Thursday, U.S. crude futures rose to $54.54 a barrel, their highest since July 2, 2015. Brent, the global reference price, broke above $60 last week as investors have latched on to signs that a coordinated effort by the Organization of the Petroleum Exporting Countries and other major exporters to curb output is working.

Global growth has also helped send the U.S. stock market to fresh records this year. Oil companies have reported higher earnings. On Thursday, Royal Dutch Shell said profits nearly tripled in the third quarter from a year earlier, helped by recovering oil prices.

It is a remarkable turnaround for crude prices, which plunged by more than 20% from February to June amid doubts that OPEC's efforts would dent the glut that has stressed the market for more three years.

Investors who had been banking on a rally at the beginning of the year became frustrated, fearing that U.S. shale producers could pounce on any brief rise in prices and pump enough oil to replace much of what OPEC and its allies were curtailing.

Since the end of March, crude inventories have fallen. The overhang of stored petroleum compared with the five-year average level in the OECD that OPEC is targeting has been cut in half since the beginning of the year, according to OPEC's figures. In the U.S., more than 80 million barrels have been drained from storage tanks since March 31.

Shrinking supplies and higher demand could align to keep prices at these levels, said Nick Koutsoftas, portfolio manager at Cohen & Steers. Mr. Koutsoftas said the global economy is strong enough to absorb Brent prices of $60 to $65 a barrel, and he anticipates that U.S. crude prices could climb to $57 or $58 a barrel by the end of the year.