WTI crude oil futures are currently trading near $100 per barrel, while Brent crude oil futures are hovering around $110 per barrel.
Neil Dingmann, an energy research analyst at William Blair, believes oil prices could be headed for a "super spike" next. However, Wall Street is not uniformly bullish, as Goldman Sachs' latest target prices remain below current oil prices.
Dingmann said: "We could see the kind of super spike that major oil company CEOs have been talking about. I think it is absolutely possible." Dingmann noted that oil company executives keep telling him that oil prices will have a higher new floor for at least the next few quarters, and he agrees: most analysts previously gave a mid-cycle price of $70 to $80 per barrel, and now it "could be closer to $80 to $90," with periodic moves above $100.
Dingmann explained: "Iranian tanker attacks are occurring frequently, and freight costs have also hit record highs. The real issue is that the physical market is becoming increasingly tight." He added that geopolitical and political events "have now caused actual physical events," and temporary remedies are unlikely to work: "Whether it is releasing crude oil from the Strategic Petroleum Reserve (SPR) or other temporary measures, it will be very difficult." The U.S. Strategic Petroleum Reserve has fallen to its lowest level since 1982.
The rise in oil prices is also reflected in asset performance. The Energy Select Sector SPDR Fund (XLE) has risen more than 50% this year, making it the best-performing of the 11 S&P 500 sectors and far outpacing the S&P 500's gain of about 12%. Since December 31 of last year, U.S. crude oil has risen more than 70%, while global benchmark Brent crude has risen about 80%. In diesel, heating oil futures, the benchmark for diesel, have more than doubled this year.
Dingmann said: "I think we have already seen record highs, and we will see even higher levels." He was referring to "diesel, gasoline, home heating fuel," where prices may continue to rise as winter approaches.
That is bad news for consumers, but good news for U.S. oil producers. Dingmann said these producers "will continue to earn substantial profits." Most of the companies he covers reported record free cash flow in the second quarter, and he expects new records in the third or fourth quarter.
Not all Wall Street institutions believe oil prices are about to spike. Goldman Sachs on Monday raised its December Brent crude target to $90 per barrel and its U.S. crude target to $81 per barrel, both below current oil prices. Goldman Sachs believes Brent crude could reach $125 per barrel only if oil infrastructure is damaged, shipping attacks intensify, or the risk premium persists.
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