With WTI climbing above $60/barrel and crude oil inventories in USA declining, oil prices are at the highest in 2015. According to EIA oil stockpiles fell by 3.9 million barrels for the week ending on May 1, a larger drop than expected. Rig count is also going down, and weekly production figures and the stock build appeared to have peaked, suggesting that supplies are adjusting lower and demand is rising.

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Top commodities official at Commerzbank told CNBC that the price rise was “premature,” and oil prices could dip back below $50 per barrel once the markets come to their senses. The markets may have overreacted here as in past years oil surges have often been followed by a price drop.

Let’s look at the facts:

  1. Oil inventories are still at 80 year highs.
  2. Oil production is still exceeding demand, leaving oil markets well-supplied.
  3. The 487 million barrels of oil sitting in storage will take quite a while to drawdown.

Here’s why oil prices still have room to drop:

Events in Libya – Recent oil price increase can partially be blamed on what’s happening in Libya. Protests stopped oil flows to the Libyan port of Zueitina in early May, reducing exports below 500,000 barrels per day from the war-torn country. However, if we have learned anything from Libya over the last year, it is that its oil production and exports are highly volatile – exports could rise once again, adding to global supplies.

Iran’s nuclear deal – There is still the potential for a major deal with Iran over its nuclear program. Iranian crude oil could still return to the market and while Iran’s oil would not begin to come in until 2016, the expectation of higher future supplies would push down prices immediately after news breaks that a deal is in hand. We’ll know more by the deadline for negotiations which is in June.

Efficiency of drillers – In their quarterly earnings reports, shale companies have emphasized their success in reducing drilling costs, ultimately lowering the breakeven price at which they can produce.

New drilling – and the completion of thousands of drilled but unfinished wells – will bring new production onto the market, potentially sending prices back down again.

Oil supplies are slowly decreasing for now, but the sharp increase in heating oil prices may just be short-lived.