Yager: Oil prices will rebound by this summer

First, there are very few accurate forecasters prognosticating about the future price of oil. Most are simply extrapolators. The default behaviour is to take whatever happened yesterday and extend it out forever. If prices are high, they’ll stay high. If they are low, they’ll never rise. 

The only other consistent trend after studying this subject since 1979 is that the consensus view is invariably wrong. It never works out the way most believe it will or should. Direction doesn’t matter. After agonizing over forecasts and budgets for publicly traded oilfield service companies for 25 years, I finally realized the only sure thing is they were never right. The unknown was how much and which way. It’s a volatile business, Alberta’s oilpatch. 

Commodity reports say world oil markets are oversupplied to the tune of two million barrels per day. All the alleged geopolitical subplots involving Iran, Russia, Saudi Arabia and the United States are interesting, but don’t mean much. The low-cost Middle East producers aren’t supporting the price at or near $100 because they are losing market share to new supplies from North America like oil sands and shale oil. They’ll never get it back if prices stay high, so they will remain abnormally low until global markets change. 

Reversing the direction of oil prices from down to up will require a verifiable swing in the supply/demand equation of at least one million barrels per day. Half from demand and half from supply. This will occur this summer, perhaps sooner.

Currently, the world burns over 90 million barrels of crude daily. The price is down by $50 a barrel. If current prices hold (which they won’t) this would save the world’s oil consumers $4.5 billion per day, or $1.6 trillion per year. Big money. For the world to consume an extra 500,000 barrels per day, demand must only rise by 6/10 of one per cent. 

The other 500,000 barrels will come from high cost/high decline oil production. No matter how the North American shale oil boom came to be, production is unsustainable without continued intensive drilling. This won’t happen because of deep spending cuts. Production decline rates are huge. In south Texas, for example, an average well’s production falls over 60 per cent in the first year. Shale oil output will drop significantly as 2015 progresses. This is physics, not economics.

DYI Comments:  Whether these low oil prices will be finished by summer with oil back up to the $80 dollar range is to seen.  However there is no doubt in my mind that this is the time to dollar cost average into your favorite oil/gas/service sector fund.  Dividend yields have improved due to the lower prices of shares which favors those who are compounding their returns (reinvesting dividends).
DYI's favorite is Vanguard's Energy Fund symbol VGENX and don't forget the precious metals (especially gold miners) companies have gone through a gut wrenching bear market that has improved their future returns enormously.

Davos oil barons eye $150 crude as investment slump incubates future crunch

Roller coaster move in prices is destructive for the oil industry and is leading to investment cuts that may store up serious trouble for the future

Rampant speculation by hedge funds and a rare confluence of short-term shocks have driven the price of oil far below its natural clearing level, coiling the springs for a fresh spike this year that may catch markets badly off-guard once again. 

"The price will rebound and we will go back to normal very soon," said Abdullah Al-Badri, Opec's veteran secretary-general. "Yes, there is an over-supply, but fundamentals don't justify this 50pc fall in price." 

Mr Descalzi said the roller coaster move in prices is destructive for the oil industry and is leading to investment cuts that may store up serious trouble for the future. "What we need is stability: a central bank for oil. Prices could jump to $150 or even $200 over the next four or five years," he said.

DYI