We’ve been skeptical about the changes of long-term cheap oil, and black gold may be starting to put in a bottom right now.
Over the last few sessions, the price per barrel of West Texas Intermediate (WTI) oil has gained over 15% since hitting a multi-year low of $43.58 last Thursday. As of this morning, WTI is trading around $51 per barrel. While these short-term moves aren’t necessarily indicative of a longer-term trend change, it’s important to recognize the steps the oil industry is taking in response to sharply lower prices.
CapEx and Drilling Cuts to Impact Production
OIl behemoths like BP plc (BP ), ConocoPhillips (COP ), and Chevron (CVX ) have recently announced large capital expenditure reductions for 2015. Next month, Exxon (XOM ) will unveil its own 2015 capex plan, which is widely expected to include big spending cuts, as well. This means less drilling projects in the coming months, and eventually, lower production. Oil prices are attempting to get ahead of this news now.
Another potential savior of oil prices at the international level is OPEC, which has yet to cut production despite oil’s sharp price drop. The cabal of 12 oil exporting countries are currently meeting in Vienna to discuss changes to their long-term policy. No decision on the strategy is expected prior to June, when the countries’ oil ministers will gather for a vote. However, that news could very well leak before June, and push oil prices higher as a result. While the U.S. doesn’t rely much on OPEC oil, OPEC still wields supreme power in the oil producing community, and its decisions influence oil prices as a whole.
Oversupply Still an Issue
U.S. oil output may actually continue to rise into the summer, because a backlog of existing projects are still being completed. According to BP CEO Bob Dudley, production should begin to decline at that point. Meanwhile, U.S. inventories will continue to balloon to new records for at least another few months. The same holds true on the international front, where storing excess oil is becoming more and more common.
Until demand catches up to supply, conventional wisdom would dictate that oil’s upside is limited. That’s not how the energy markets really work, however. Many factors contribute to the price of oil, including speculative investors, political pressures, taxes, and even collusion among producers. Black gold’s price volatility is thus a virtual certainty throughout 2015.
The Bottom Line
Oil itself, and by proxy, just about every company involved in the oil industry, has had a rough go since mid-2014. Some signs of a bottom are beginning to emerge, however, and production cuts among major producers both at home and abroad will go a long way in helping limit further damage this year.
For the longer term, we remain skeptical of continually depressed oil prices. The risk/reward is beginning to look much better for oil plays, and while the perfect buying opportunity may not quite be here yet, future investors may very well look back at 2015 as a great time to get some energy exposure. Investors should continue to monitor the situation closely, and of course, we’ll continue to add our own analysis into the mix as the story develops.
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