As recently as June, West Texas Intermediate Crude traded at more than $100 per barrel. Today it’s at $67. That’s a 37% decline for the biggest commodity in the world.
Last Friday, Americans woke up from their Thanksgiving-induced comas to discover oil prices fell another 10%.
For decades, OPEC has controlled the global oil markets. With crude prices crashing, the OPEC ministers decided to meet up in Vienna to chat about oil production.
The OPEC members were split about how to react to low oil prices. The sale of oil is a huge part of the economy for OPEC countries. The financially weaker nations advocated cutting production to firm up prices. Meanwhile, the far more powerful and financially sound Middle Eastern countries – including Saudi Arabia – held their ground.
The Saudis expect crude to stabilize around $60 per barrel. Thanks to the country’s $750 billion in cash reserves, they can afford to weather a steep decline in oil. They would rather sell oil at lower prices, rather than reducing production.
At the end of the day, OPEC agreed to keep pumping out 30 million barrels of oil per day. The wealthier OPEC nations are taking a long-term view. They would rather see oil prices fall in the near term. The reason is simple: they want to put pressure on the U.S. shale producers.
It’s old news that U.S. oil production has been soaring. New drilling techniques have fueled an American energy renaissance. With the current production of 9 million barrels per day, U.S. oil is finally pushing prices down.
The Saudis may think that cheap oil will slow U.S. production. Theoretically, you would think that energy companies would curb their drilling programs in the face of weak prices.
But for the time being, activity in the energy patch remains steady. A report this week from the Federal Reserve gave us unique insights from the energy market. Some of the highlights included:
Atlanta Fed: “Steady production is anticipated in both deepwater and onshore drilling.”
Minneapolis Fed: “Despite recent declines in oil prices, officials in North Dakota expect oil production to continue increasing over the next two years.”
Kansas City Fed: “Most contacts continued to report a high level of drilling activity, and active oil and gas rigs rose through early November, particularly for natural gas. Respondents remained optimistic about future drilling but were closely monitoring the price of oil, which was close to many firms’ breakeven price.”
Dallas Fed: “Growth in Texas drilling activity was concentrated in the Permian Basin in West Texas; drilling activity outside of the Permian Basin was little changed.”
Right now, lower crude prices aren’t slowing down U.S. producers. That’s likely because existing wells have already been funded. Once they’re built, they aren’t expensive to operate. Additionally, drilling for oil in the U.S. is less expensive than in many areas of the world. That gives American energy companies a competitive advantage.
Looking forward to 2015, U.S. oil production is expected to rise by 500,000 to 1.5 million barrels per day. With more production coming online, it’s possible that prices will fall even further.
Oil Prices Plunge
Yet after such a sharp decline, crude needs to find a bottom. That bottom may be right here around $67 per barrel. Or perhaps it’s down in the $50s.
Without a doubt, we’re in the midst of an oil war. Neither the Saudis nor the Americans are prepared to cut production. And that means oil isn’t going back to $90 or $100 anytime soon.
In the meantime, the biggest winners will be American consumers. With gasoline now below $2 per gallon in some parts of the country, the cash savings for the average American family are significant.
Right now, a select group of energy stocks look to be bottoming.
This article is brought to you courtesy of Ian Wyatt from Wyatt Investment Research.