The Case for $85 WTI by Year-End 2016

With the recent recovery in WTI to $40 Bbl (from the lows of $27 Bbl), a few Analysts are now calling for $85 WTI by year-end. So, what exactly is driving this extremely bullish view on WTI and is it possible? The argument for $85 oil by year-end hinges on two factors; one is demand growth and the other is a contraction of non-OPEC supply (the first time this has happened in about eight years). Specifically, increased demand at a time of shrinking supply could boost prices. Analysts are pointing to a few key near-term trends: 1) the IEA could be underestimating oil consumption in the non-OECD countries 2) oil markets could be tighter than everyone thinks (i.e. oil inventories could be drawn down contra-seasonally) and 3) significant reductions to oil and gas capex and reduced upstream activity will significantly affect future production growth. Although $85 WTI by year-end may seem optimistic, one could make the case for $50-$60 WTI based on the above near-term trends. With last weeks surprise draw in U.S. crude inventories (draw of 4.94 million barrels), we are already seeing physical evidence of a contraction in non-OPEC supply.