Oil Has Been Slipping. Here’s What to Watch for Next.

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Oil prices have risen this year as the economy recovers.

Johannes Eisele/AFP via Getty Images

Oil prices, which have taken a breather recently after a sharp 2021 runup, are likely to hang on to their year-to-date gains. If they don’t, look out for trouble.

Crude oil is up more than 20% so far this year, to a recent $59 a barrel for West Texas Intermediate, as reopenings led by Covid-19 vaccine inoculations have coincided with pent-up demand from trillions of dollars of fiscal stimulus. All that is powering both consumer and business demand for oil and gas.

Yet recently, oil has cooled off. It’s down 10% from its 2021 high of $66 a barrel established in early March, the highest level since September 2018. Recently, oil has bounced around between $57 and $66.

When it dips just below $60, it tends to edge higher. “As long as demand expectations don’t deteriorate materially, oil should be able to hold support in the mid-to-upper $50s,” Tom Essaye, founder of Sevens Report Research, wrote in a note. Essaye has a Neutral recommendation on crude oil, though he told Barron’s it could go as high as $70. In a separate report, RBC said it expects an average oil price for this year of $63 a barrel, roughly 6% above current levels.

Indeed, demand has hummed along with the economic recovery. Reopenings are increasing as more people are vaccinated. And with household savings piling up, thanks to a rebounding jobs market and the stimulus, gross domestic product growth expectations have risen to more than 7%.

To be sure, an economic shock could significantly dent oil prices. Essaye counsels traders to watch closely for any decline toward “the low $50s, [which] would suggest fading optimism toward the global economic recovery.” Less optimism about the recovery could spell trouble for lots of assets. The

S&P 500

is up 9.9% this year.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com