Supply Side Says That Lower Oil Prices Could Be Ahead
Oil prices could be setting up to disappoint investors. If they drop, oil company stock prices could tumble. Be very careful.
Recently, there have been a lot of forecasts by big banks that the price of oil will soar to $100.00 a barrel. It has to be questioned whether this is possible. Basic economics suggest that prices may decline rather than soar.
As it stands, the oil supply is surging while the demand side looks anemic.
There’s one place that must be watched closely: the United States.
U.S. oil is flooding the market because oil production in the U.S. has been soaring. In March, U.S. oil production reached almost 10.5 million barrels a day. This was the highest U.S. oil production level on record. (Source: “U.S. Field Production of Crude Oil,” U.S. Energy Information Administration, last accessed June 12, 2018.)
The country is exporting a lot more oil than it did before.
In March, U.S. oil exports amounted to almost 1.7 million. A year earlier, exports were just above 0.8 million. So, over a one-year period, U.S. oil exports soared by more than 100%. Mind you, these oil export figures are the highest ever on record. (Source: “U.S. Exports of Crude Oil,” U.S. Energy Information Administration, last accessed June 12, 2018.)
Here’s the thing: for a lot of oil companies in the U.S., oil at $60.00 a barrel is the magic number. It’s when their resources become feasible and profitable to produce.
So, the longer that oil prices remain above $60.00 a barrel, the longer one can expect an influx of U.S. oil.
Beyond U.S. oil, take a look at Saudi Arabia and Russia. Both of these major oil producers are either already increasing their production or are planning to do so.
Saudi Arabia, for example, is producing more than 10.0 million barrels a day—its highest amount since October 2017.
It’s expected that Russia will call for higher oil production soon as well. (Source: “Saudi Oil Output Rises Above 10 Million Barrels a Day,” Bloomberg, June 11, 2018.)
Demand Side Remains Anemic at Best
Mark my words: oil is needed in times of global growth and prosperity. We are not there yet though; we have major problems brewing across the globe:
- There could be a financial crisis in the Chinese economy (one of the biggest oil consumers).
- Europe’s economy continues to remain stagnant. Just look at the economic data.
- The U.S. economy is peaking. There’s a lot of data backing up this argument.
- Emerging markets are facing a crisis of their own. Just look at their currencies; lower currency value makes oil costly for them.
In addition to all this, you must remember there’s a looming trade war among major economies.
Oil demand could take a severe hit in the midst of all this.
Don’t Rule Out an Oil Price Crash Just Yet
For oil investors, it may be a good idea not to get complacent.
Surely, oil prices have had a solid run to the upside. But the upside could be very limited ahead. In fact, don’t rule out an oil price crash just yet. It could happen sooner rather than later. The basic supply and demand situation warrants that.
How low could the price of oil go in the case of a crash? Dear reader, the oil market tends to be volatile. If we see more news about the soaring supply and dismal demand, I wouldn’t be shocked to see a 20%–30% decline in no time.