How Low Will Oil Prices Go?
Oil prices plunged below $70 on Thanksgiving Day last week.
Wall Street Daily readers know that I have been writing about this inevitable drop since July 2013.
It’s an early present for economies that aren’t dependent on oil and gas for the majority of their growth.
Gasoline prices in the United States will approach $2 per gallon and may break that level in the coming weeks. The ultra-low prices will be a major stimulus, bigger than any tax break that the public has seen in years.
It’s hard not to be excited about it… unless, of course, you own energy stocks.
So how far will it go?
Writing’s on the Wall
Lower oil prices are incredibly simulative. Many average Americans will be joyfully spending their “extra” money on more presents, along with more oil and energy.
You see, low oil prices means cheap energy to produce and cheaper materials, like plastics. The savings get passed on through cheaper products and will boost export margins.
And we’ve already seen a rise in large-car purchases. And come this holiday season, many families will decide that they can take that road trip to Grandma’s house.
But many consumers don’t seem to realize that there’s a surplus of oil in the market, mostly from shale oil production in the United States. When this surplus gets sopped up like Thanksgiving gravy, and it will, the price of oil will stabilize and rise again.
Take it from me, these prices will be short-lived.
The industry is overreacting. Just as I predicted the price drop, my analysis of the entire situation is that prices aren’t going to be at or below $30 per barrel, as others had said.
Drop’s Almost Over
The market should focus on where prices need to be, especially for OPEC countries, not where their cost of production is currently. These countries are completely reliant on oil for their domestic economies. Saudi Arabia, Iran, Russia, and Venezuela need oil prices to be above $90 per barrel in order to function without incurring massive debt and stirring socioeconomic unrest.
OPEC countries also have massive amounts of cash stockpiled in anticipation of such a fabricated crisis. They’ll be burning through that cash in the coming months, allowing prices to stay below $80 for some time. There’s even a chance of some short-term shocks that will send oil prices below where they sit today.
But, the majority of the plunge has already taken place. We aren’t going to see another $40 plunge from current levels.
In the meantime, OPEC is hoping that the shock will be great enough to put the marginal shale producers out of business and shrink U.S. oil production to levels that are less of a threat.
OPEC will succeed, and companies will cut spending on new drilling and operations as the profit incentive drops, much like it did with natural gas. In fact, it took the natural gas industry more than two years to recover from the plunge to $2 per mcf and make it back to over $4 – the price they could make a profit.
It will be no different this time. The time for panic was when oil was at $100, not when it’s at $60.
Opportunities will abound in the coming months. In the next issue, we’ll look at one of those said opportunities that could pay out on a global scale when prices recover.
And “the chase” continues,