3 Reasons Why Crude Will Stay Under $50 Through 2015

by Sean Brodrick
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Editorial Note: The energy sector is a hot topic right now - and there are many different opinions as to where things are heading. Yesterday we published a piece by Marc Lichtenfeld asserting that oil will soon be on its way to $100 per barrel. (If you missed it, click here.) Meanwhile, as you’re about to find out, Sean Brodrick isn’t quite so bullish. Feel free to comment on either article and let us know who you agree with. And be sure to check back next week for David Fessler’s perspective on this ever-changing situation.


Thanks to the American oil production boom, the price of crude has fallen hard - down nearly 60% from its peak in June. Now we hear some people predicting $30 or even $20 oil... while others say it’s going to rally back to $80 by July.

The thing about oil prices, to quote Yogi Berra, is that “predictions are hard, especially about the future.” However, I will give you my best-guess forecast. And that is: I believe the price of West Texas Intermediate, the U.S. crude oil benchmark, will remain under $50 for the rest of the year.

By that, I mean we could see panic spikes up and down, but the average range will be under $50. And let me give you three reasons why...

Reason No. 1:

Price Support Is Near

Back in late 2008, early 2009, the price of West Texas Intermediate tested $38 per barrel. We are closing in on that price level. A test somewhere between $37 and $40 is likely.

When that support is tested, we’ll probably see buyers come in. Such a bounce would put a long-term double bottom on the chart, and traders would probably see that as a line they want to defend.

Now, that support doesn’t have to hold. But we know that current prices make a lot of producers nervous. Any price under $40 will likely trigger some hard decisions on production. (My colleague David Fessler touched on this particular point last week. Click here for his thoughts.)

So, I see this as a likely floor for prices. Why do I think prices won’t be able to sustain a rally above $50? I’ll tell you...

Reason No. 2:

The World Is Swimming in Crude

U.S. crude oil production rose to 9.2 million barrels per day (bpd) as of January 23. That’s the fastest pace in at least three decades, according to the Energy Information Administration.

A year earlier, the U.S. was producing just 7 million bpd. What a jump!

And it’s not just us.

  • In 2014, Russia's average oil output hit a post-Soviet record high of 10.58 million bpd. If the world’s oil producers are looking for short-term relief, they won’t find it in Russia, which is inking one deal after another to supply China with oil and gas.
  • Iraq’s oil production just surged to the highest level in decades. Iraq exported nearly 3 million bpd in December, the most since the 1980s.
  • Canada’s oil shipments to the U.S. are up 63% in the past five years to a record 3.1 million bpd. In January, the new Seaway Twin pipeline nearly doubled the amount of heavy Canadian crude coming to Gulf terminals and plants - to about 400,000 bpd.

All told, there is a surplus of about 1.5 million bpd of crude oil in the market. Until that is eaten up, it’s hard for crude prices to go much higher.

Right now, about 58 million barrels of excess crude are being stored on oil tankers. When prices rise, that oil will come onto the market, driving prices down again.

And that’s not all...

Reason No. 3:

There’s More Where That Came From!

See, we Americans tend to be myopic and think the rest of the world doesn’t matter. Believe me, it does. Especially for future oil supply.

Iraq holds the world’s fifth-largest oil reserves. Today, it’s adding more oil to the global markets than any other nation in OPEC. In early January, Iraq produced 4 million bpd of oil, and exported nearly 3 million bpd of it.

Iraq’s northern Kirkuk oil fields currently export about 150,000 bpd. Soon, that will jump to 375,000 bpd... and then to 600,000 bpd.

And let’s not forget Iran. It has the third-largest oil reserves in the world. Iran’s exports have been suppressed due to sanctions over its nuclear program. But the country is getting close to working out a deal that could end those restrictions.

If it does, Iran could ramp up oil production, from a recent 2.8 million bpd to something closer to 5.7 million bpd by 2018.

So, sure, U.S. shale oil projects will decline if prices stay low. But cheap oil from Iran and Iraq could replace it.

But it isn’t all bad.

Good News!

You Can Profit From Lower Oil Prices

There are plenty of companies that do better when oil prices go down. Think about consumers who suddenly have a lot more money in their pockets... companies that use a lot of fuel and now have wider profit margins... automakers that see a surge in sales of expensive gas-guzzlers... and more.

I’ve already recommended some in Oxford Resource Explorer. And I’m sending out a report to my subscribers this week that talks about these big trends and gives them a brand-new pick to profit from lower prices at the pump.

It’s a great time to be in the market. And this trend of lower oil prices is one you should ride. I think it’s going to be in place at least through the end of this year... and we’ll see how things look then.

Just remember to do your due diligence before you buy anything.

All the best,

Sean

 Do you agree with Sean? Share your opinion in the comments below.

P.S. While larger producers will survive today’s low-price climate, some smaller oil companies won’t be so lucky. David Fessler recently compiled a list of stocks most likely to fail in a report titled “Oil Company Death List: These 19 Oil & Gas Stocks Will Soon Die.” To access the entire list, click here.


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This Automaker Is Experiencing Record Sales as Gas Prices Dwindle

With oil prices down, there are plenty of bargains to be had in the energy sector. But as Sean mentioned, cheap oil is also great news for automakers.

Particularly Toyota Motor Corp (NYSE: TM)...

Since January 2, as prices at the pump have dwindled, Toyota shares have risen close to 5%. Soaring emerging market demand for Corollas, Camrys and Tacomas has also helped bolster the stock.

To add to that, Toyota was just recognized by Consumer Reports for its “world-class reliability,” with products taking the top spots in 10 out of 18 model categories. That’s a major feather in any automaker’s cap and should help increase sales throughout 2015.

Our Chief Investment Strategist, Alexander Green, probably sums it up best. Here’s what he had to say about the company back in October: “[It’s] not hard to sum up our enthusiasm for Toyota’s prospects. Combine industry strength, market dominance, unbeaten quality, lower energy prices and record sales and you have a highly attractive outlook.”

- Alexander Moschina with Alexander Green

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