Expect Oil Prices To Rebound
We are in the midst of the worst oil bust in decades. The industry hasn’t been in this bad shape since 1999, or even 1986. With prices spiraling to less than $40/barrel, companies have been forced to slash both drilling activities and jobs.
Meanwhile, consumers are rejoicing. The average gasoline price in the U.S. could even fall below $2/gallon, according to AAA.
Things certainly look great for consumers and horrible for producers, but don’t get used to the current situation. Prices are likely headed higher by the end of 2016.
The biggest culprit for oil’s plunge starting in the middle of 2014 was the enormous growth in U.S. shale production. Output in the country had grown by nearly 1 million barrels per day for three-straight years up until that point. The market simply couldn no longer absorb that breakneck pace of growth.
Prices cratered from more than $100/barrel in July 2014 to less than $45 in early 2015 (later moving even lower, to $37.75 in August).
Compounding the oil market’s problems was a surprise decision by the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, to increase its production to punish and steal market share away from U.S. producers.
OPEC’s strategy worked, and now U.S. output is tumbling on the back of reduced drilling, with daily production down 500,000 barrels from its high of 9.6 million barrels per day.
At the same time that supply struggles, demand is headed the other way. According to the International Energy Agency, consumption is on track to increase by 1.8 million barrels per day this year, the fastest pace of growth in five years. As long as prices stay low, there’s no reason to expect demand to slow down anytime soon.
However, supply continues to outpace demand. The big 2.5 million barrels per-day jump in OPEC production since the middle of last year has outpaced even the massive increase in demand.
But with OPEC now pumping full tilt, the cartel is effectively maxed out.
If demand rises another 1.5 million barrels per day or more in 2016, that could finally shift the oil market into a deficit, lowering inventories and sending prices spiking.
Pira Energy Group, a firm highly regarded for its energy price forecasts, says that it takes nine months for U.S. companies to bring new production on-stream once it becomes profitable to drill again.
The firm suggests that oil will climb to $70 per barrel by the end of 2016, a whopping 75% increase in prices from current levels that would also likely benefit energy and oil-linked stocks and ETFs.