At the end of 2016, most investors cheered the “historic” agreement between OPEC and other major oil-producing nations to curb their output. During those heady days, Wall Street analysts’ median forecast called for West Texas Intermediate (WTI) to average $56 per barrel by the third quarter of 2017.

We expressed a less sanguine outlook in an Alert issued on Dec. 12, 2016:

OPEC would lose credibility next year as the regulator of the global oil market. Meanwhile, WTI will range between $40 and $60 per barrel for at least the next two to three years. In the near term, we continue to expect WTI to tumble to less than $40 per barrel, once these realities become apparent.

Our primary concern: That OPEC’s machinations would encourage shale producers to ramp up activity levels dramatically in late 2016 and early 2017, creating the risk that growth in US oil output would surprise to the upside and offset OPEC’s supply reductions.

Although WTI managed to hold the line around $54 per barrel through the end of February 2017, market participants began to fret about rising production from US shale plays, precipitating a series of sharp pullbacks in oil prices. These bouts of volatility culminated in a low of $42.05 per barrel on June 21, 2017.

WTI didn’t fall below $40 per barrel, but our call proved directionally correct and the faster-than-expected recovery in US shale production dominated the conversation in the first half of 2017.

Moreover, the failure of OPEC’s restraint to boost oil prices in the short term prompted questions about the organization’s market influence in a world where short-cycle shales plays can ramp up relatively quickly.

We changed our tune in the July 14, 2017, issue of Energy & Income Advisor, once again leaning against the consensus to espouse a bullish outlook for oil prices in the back half of last year: “Although WTI remains at risk of retesting last summer’s low of about $39 per barrel, we expect oil prices to find a major bottom in July or August, followed by a rally that could propel WTI to between $50 and $55 per barrel by year-end.”

The day that we published our revised outlook WTI traded at $46.54 per barrel. Our bullish call rested on five pillars:

• US oil inventories, the most high-frequency and visible data point for the supply glut, began their seasonal decline a month earlier than usual and had started to fall at an above-average rate by midsummer;
• US refined-product demand and vehicle-miles driven pointed to robust consumption;
• US oil exports grew to record levels, helping to drain excess supply and meet strong overseas demand for crude;
• An increase in the US oil-directed rig count, the lynchpin of our bearish call in late 2016, flattened out, suggesting that exploration and production companies had moderated activity levels in response to lower commodity prices; and
• Hedge funds, which had amassed a record long position in WTI futures in early 2017, had reverted to a sizable net short position–a powerful contrarian signal.

Although this bullish call seemed aggressive in July 2017, this outlook turned out to be too conservative: WTI jumped above the high end of our target range, reaching $60 per barrel by year-end. Nevertheless, the five upside catalysts that we highlighted played out, driving crude prices higher.

The action in oil prices and energy stocks last year underscores the importance of adjusting your view in response to developments on the ground. As market conditions evolved, so did our outlook and positioning.

We remain constructive on oil prices for the balance of 2018 and expect WTI to average about $60 per barrel while spending the bulk of the year between $55 and $65 per barrel. At $64 per barrel, WTI now trades near the top end of this range.