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Oil Prices Could Crash: Just Look at the Soaring Supply Lombardi Letter 2018-06-26 11:11:49 The supply side of the oil market foretells a crash in oil prices. Key oil-producing regions have been producing oil at an accelerated pace while the demand side has been struggling. Analysis and Predictions,Commodities,Oil,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2018/06/iStock-905461512-150x150.jpg

Oil Prices Could Crash: Just Look at the Soaring Supply

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Oil Prices Could Crash

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Oil Prices Could Tumble on the Back of Surging Supply

If you are bullish on oil prices, keep in mind that the downside could be very big, while the upside could be very limited.

Supply and demand matter a lot when it comes to the pricing of commodities. The oil market follows these principals, too. And right now, we have a soaring supply and stagnant demand at the very best.

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Before going into any details, let’s go back a few years, when the price of oil was crashing. Why did the price come down from around $110.00 a barrel in 2014 to below $30.00 a barrel in 2016? Because we had an influx of supply to the oil market. U.S. oil production was surging, Iraqi oil production was increasing, and even war-torn countries like Libya were producing more oil.

Oil Production Remains Elevated

As it stands, there’s more oil production these days than when oil prices were crashing because of supply issues.

In March 2014, the U.S. was producing almost 8.3 million barrels per day. In March 2018, that figure was almost 10.5 million. That’s an increase of 27%. (Source: “U.S. Field Production of Crude Oil,” U.S. Energy Information Administration, last accessed June 25, 2018.)

With the price of oil remaining above $60.00 per barrel, don’t be shocked to see more American production. It’s the “magic number” for oil companies in the U.S.; they are generally profitable at that level. As a result, they could be cashing out the resources as fast as they can.

However, if you look beyond the U.S., you will see that oil production is increasing everywhere.

In early 2014, Iraq was producing around 300,000 barrels of oil a day. Now, it’s producing around 450,000 barrels—a 42% increase. (Source: “Iraq Crude Oil Production,” Trading Economics, last accessed June 25, 2018.)

No matter where you look, oil-producing countries are doing so now more than they did in 2014. This includes Russia, Canada, Brazil, and many other countries. Even the Organization of the Petroleum Exporting Countries (OPEC) recently announced that it will be producing more, going forward.

Oil Demand Could Face a Lot of Headwinds

On the oil demand side, there are a lot of headwinds.

First, the global economy is not growing much. The International Monetary Fund (IMF) expects the global economy to grow 3.9% in 2018 and 3.9% in 2019. These forecasts tend to get revised lower, however. (Source: “World Economic Outlook, April 2018: Cyclical Upswing, Structural Change,” International Monetary Fund, last accessed June 25, 2018.)

Don’t overlook what’s happening elsewhere. China is slowing down, and in the eurozone, the European Central Bank (ECB) isn’t too confident about growth; it plans to keep the interest rates low until at least summer 2019. In the U.S., meanwhile, the odds of a recession are stacking higher.

Oil demand is heavily dependent on economic growth, increasing when it’s present. If an economic slowdown is likely to happen, oil demand could face headwinds.

Oil Prices Outlook for the Rest of 2018 and Beyond

Dear reader, since the lows in 2016, oil prices have had a solid run, more than doubling in value.

However, it’s very difficult to see the price increasing 50% from where it currently sits. Given the soaring supply, I would not be surprised if we see a crash in the price of oil sooner rather than later.

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