Oil Prices Could Be Falling On the Back of Increasing Production
Oil prices could be setting up to disappoint. If you own or are planning to buy oil stocks, be very careful.
Over the last year, oil prices have rallied. Why? Because everyone seems to buying into the idea that there’s growth in the global economy, and a lot of oil could be needed in the coming quarters.
But there’s one thing that mainstream seems to be getting wrong. Sure, there could be growth in the global economy and a lot of oil could be needed. However, there’s even more oil, and more supply is expected ahead. Don’t be shocked if the oil market is flooded, despite the demand increasing.
One key oil supply source is the U.S.; we see the production of oil ramping up very quickly.
Consider this: in January 2017, U.S. crude oil production mounted to 8.82 million barrels per day. In November 2017, crude oil production was 10.03 million barrels a day. In matter of 11 months, crude oil production in the U.S. increased by close to 14%. Mind you, the U.S. production currently stands at highest level since the early 1970s. (Source: “U.S. Field Production of Crude Oil,” U.S. Energy Information Administration, last accessed February 27, 2018.)
If oil prices continue to hover around $60.00 per barrel, expect these production figures to much higher in the next year. It’s not out of the question to see a U.S. production record for oil soon. Why? Because at $60.00 a lot, oil becomes sustainable to produce.
U.K. Set to Become an Oil Exporter Soon
If you look elsewhere–and disregard the Organization of the Petroleum Exporting Countries (OPEC)–there are a lot of oil supply stories emerging.
Take the United Kingdom, for example. The country is set to become an oil exporter for the first time in 14 years, with the oil output in the country set to hit one million barrels per day. (Source: “Make Room OPEC: U.K. Is Set to Become Net Crude Oil Exporter,” Bloomberg, February 26, 2018.)
Between 2000 and 2014, the country’s oil and gas production witnessed consecutive declines.
Oil Prices Outlook for 2018: Major Declines Could Be Ahead
Dear reader, I have mentioned this before, and I will say it again: there’s too much oil and not enough matches.
Even if the demand for oil increases (if you subscribe to the theory that states the global economy is witnessing robust growth), the supply side will flood the oil market, and it could have an adverse effect on oil prices.
I don’t see a lot of upside for oil prices. Certainly, on speculation, it could go a little bit higher, but the upside seems very limited.
Eventually, when reality kicks in, we could be seeing investors rushing to sell. This could cause a massive sell-off in oil prices.
With all this in mind, it may not be a bad idea to rethink oil stocks and related investments. If oil prices drop all of a sudden, profitability at oil-producing and services companies could plummet, and obviously their stock prices will reflect this.