Oil Prices Have Done Well Year-to-Date, But Are Not Sustainable for the Long Term
Oil prices have performed well so far this year. Year-to-date, oil prices have soared 20%. However, these gains could be very short-lived. If you own oil stocks, be very careful.
One of the biggest reasons that oil prices witnessed an upside this year is that President Donald Trump said that the U.S. would pull out of the Iran deal that was made during Barack Obama administration.
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His reasoning: it was a bad deal for the U.S.
This has many concerned that, without the Iran deal, we could see a lot of uncertainty in the Middle East region. This could cause supply problems in the oil market.
The Iran deal wasn’t just between the U.S. and Iran alone. Other European countries were involved in it too. Those countries have not pulled out like the U.S. has.
Look at the Supply and Demand of the Oil Market
Beyond this, understand that the oil market’s supply and demand situation suggests that oil prices could tumble.
Basic economics: when supply surges and demand declines, prices decline. This is what we are seeing in the oil market.
First, look at the demand side…
Just recently, the International Energy Agency (IEA) cut its global oil demand forecast for 2018. Why? It blames higher oil prices. The IEA said, “It would be extraordinary if such a large jump did not affect demand growth…” (Source: “Oil Market Report,” International Energy Agency, May 16, 2018.)
As this is happening, we are seeing production surge.
It can’t be stressed enough: look at the oil production figures in the United States. In February, U.S. oil production amounted to 10.3 million barrels a day. That’s the highest ever recorded—well above what it used to be in the 1970s.
Mind you, between November 2017 and February 2018, U.S. oil production was over 10.0 million barrels a day. This is the longest streak that U.S. production remained above 10 million barrels a day.
Don’t take this lightly whatsoever; this makes a bearish case for oil prices.
Mark my words, as oil prices remain elevated, don’t be shocked to see oil companies in the U.S. pump out as much oil as they can. Why wouldn’t they want to cash in their resources when they can at higher prices?
While the U.S. continues to add to the supply, other sources that used to be relatively unstable are becoming more stable.
For instance, Iraq’s oil production has been stable lately. Iraqi oil production is well above what it used to be in the 1980s. Since July 2017, the country has been consistently producing about 4.4 million barrels a day. (Source: “Iraq Crude Oil Production,” Trading Economics, last accessed May 22, 2018.)
Libya’s oil production is also soaring. In April 2017, the country was producing around 550,000 barrels per day. Now, it’s close to 1.0 million barrels per day. (Source: “Libya Crude Oil Production,” Trading Economics, last accessed May 22, 2018.)
What’s Ahead for Oil Prices?
Dear reader, the supply and demand sides of the oil market are very loud and clear: oil prices could fall.
I believe that the increase in oil prices since the beginning of the year may not be sustainable over the long term. For oil prices, the upside seems limited while the downside could be big.
With all this said, if oil prices tumble, oil company stocks could tumble as well. Oil producers’ stocks have done well over the past year or so. They may not be as hot by the end of 2018.
