Crude Oil: Basic Fundamentals Suggest Flat Prices Ahead

Pro_Con_May_15_2015_WEB_marvasti_4PM_imageIn the past few weeks, crude oil prices have seen a sizable move to the upside. We are looking at the long-term picture and asking if this rally will continue.

U.S. Crude Oil Inventories Falling, Production Declining

One of the biggest reasons we are told crude oil prices are moving high is because of declining inventories.

Consider this; according to the latest data from the Energy Information Administration (EIA), on Wednesday, May 13, 2015, crude oil inventories fell by 2.19 million barrels for the week ending May 8, 2015. This was a second decline in the row. (Source: Energy Information Administration web site, last accessed May 13, 2015.)

On the production side, total U.S. crude oil production averaged an estimated 9.3 million barrels per day (b/d) in March, but is expected to decline from June through September before growth resumes. Total crude oil production is forecast to decrease by 100,000 barrels in 2015 and 2016. (Source: Energy Information Administration web site, last accessed May13, 2015.)

Is this enough reason to turn optimistic toward oil? Don’t be too quick to judge; crude oil inventories are still at an 80-year high. Prior to declining for the past two weeks, they were actually rising since January of this year. 

Don’t Forget the Big Picture

Understand that the U.S. isn’t the only crude oil producer in the global economy. There are a number of heavyweights who have the ability to produce more. Just recently, I wrote how the Organization of the Petroleum Exporting Countries (OPEC) plans to keep its production the same. (See “OPEC Continues to Manipulate Global Oil Prices.”)

OPEC has also provided guidance that it sees oil to remain below $100.00 until 2025. They have even said that oil prices can be as low as $40.00 by that time.

While oil production in the U.S. economy may have slowed (or is slowing), there isn’t much evidence that it’s slowing elsewhere in the global economy.

Crude Oil Price to Remain at the Same Level?

There’s a significant amount of noise surrounding where crude oil prices are headed next. When assessing a market, attention must be paid to the basic economics; supply and demand are the most important factors of price. As it stands, they say at the very best, crude oil prices will rest at the current level for some time, if not see an outright decline.