Oil Prices Could Go Much Lower Due to Simple Economics
If you own oil-related investments, beware: oil prices could be setting up to collapse.
You see, supply and demand rule everything. If there’s low supply and high and/or increasing demand, you will see the price of oil shoot higher. And if there’s increasing supply and declining demand, you will get a massive decline in prices. The oil market is going through the latter.
In early 2019, investors bought oil because the U.S. was talking heavily about military action against Iran and Venezuela. The logic was simple: the oil market will face a shortage if those countries are engaged in conflict.
Iran, a major petroleum producer, threatened to close one of the key routes in the oil market. Venezuela, also a big producer, would make a big impact if it took similar action.
Those risks have since diminished significantly, or at least there hasn’t been much talk about it in the news lately.
Demand Expected to Decline Thanks to Slowing Global Growth
At the same time, we have been hearing a lot of bad news regarding the global economy.
Keep in mind that, if the global economy slows down, less oil will be needed and demand will take a huge hit. This, of course, would hurt oil prices.
To give you some perspective, the U.S. and China, two of the biggest economies and oil users in the world, are currently engaged in a trade war. If the trade war persists, the subsequent economic decline will mean less oil will be needed.
And it’s not just the U.S. and China. Point to any major country on a map and chances are that it has been reporting dismal economic data.
The eurozone countries are struggling to report any growth, the U.K. recently reported a decline in gross domestic product, Japan remains stagnant, Australia and New Zealand seem to be running into problems, Canada is slowing down—the list goes on.
Oil Production Continues
On the supply side, production continues to remain very strong.
In March 2019, U.S. oil production amounted to 11.9 million barrels per day. Over the past few months, this has been the average. (Source: “Petroleum & Other Liquids,” U.S. Energy Information Administration, last accessed June 12, 2019.)
Just five years ago, U.S. oil production was nowhere close to what it is now. In March 2014, for example, U.S. oil production was around 8.2 million barrels per day. That means production has increased by over 45% in just five years. And there isn’t any sign of that production slowing down anytime soon.
Look at the other major producers like Saudi Arabia and Russia; they continue to produce massive amounts of oil as well.
Oil Price Outlook: Don’t Rule Out $42 Per Barrel Just Yet
The case for lower oil prices continues to get stronger.
At the moment, the $50.00 level looks strong. But if the price drops below that, I will not be shocked to see the late-2018 lows of around $42.00 being tested. That’s roughly 20% below the current price.
I’ll repeat what I said earlier: be very careful if you own oil-related investments.