Crude Oil: How Low Will It Go?
Crude bears are quickly coming out of hibernation…
As energy investors are fully aware, bulls have been in control of oil prices for most of the summer. Multiple Middle East uncertainties pumped a massive fear premium into the crude market starting in early July.
The essential commodity shot to $112 a barrel when Chicken Little investors thought the US would attack Syria in retaliation for chemical arms use.
But like I warned here and here, the summer run up in oil prices was nothing but a speculative frenzy. I went on the record saying anyone getting long the oil market at nosebleed levels would regret it.
Take a look at where crude’s trading now…
As you can see, it has been a steady downhill slide for crude since early September. Once investors finally realized Middle East troubles had little chance of affecting big oil producing countries, buying interest waned.
And it wasn’t long before bears took complete control.
As of this morning, WTI crude is trading around $96 a barrel. The recent selloff has been steep and unforgiving for a number of reasons.
Let me explain…
First of all, US oil supplies are overwhelmingly abundant. In fact, the last two weekly Energy Information Administration (EIA) crude inventory reports came in well above analysts’ expectations.
No doubt about it, US crude inventories are building as the summer driving season is squarely in the rear view mirror.
And that’s not all…
The International Energy Agency (IEA) recently announced the US would overtake Russia as the world’s number one crude producer in 2014.
Staunch energy market observers may remember the IEA made this same prediction in 2012. But at the time, they predicted the US’s rise to world energy dominance wouldn’t happen until 2020.
What a difference a year makes…
US oil producers are proving skeptics wrong as US oil production continues surging. In fact, the most recent EIA report shows nearly 7.9 million barrels per day (mmBpd) were produced for the week of October 25th, 2013.
That’s an enormous increase from the 6.6 mmBpd produced last year at this time.
US crude inventories are clearly on the rise. What’s more, the trend is expected to continue for many years to come as oil explorers unlock energy potential in additional US shale basins.
How low can crude prices go as a result of this trend?
Estimates are all over the map. Some in the industry say oil could drop to the $50 a barrel range.
I won’t go that far…
You have to remember that pulling oil from shale is an extremely expensive process. Breakeven costs for the average shale producer are around $90 a barrel in most areas.
But that doesn’t mean crude can’t dip into the mid-$80 a barrel range for a short time.
Bottom line…
This summer’s crude blowout was solely due to rampant speculation. As I predicted weeks ago, prices are finally starting to reflect the actual supply/demand situation here in the US.
Until Next Time,
Justin Bennett
Category: Commodities
