Oil prices have hope as supply & demand try to find market equilibrium

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Getty Images

Over the past six months, crude oil prices have fallen more than 50 percent, pleasing consumers at the pump. The reason they are pleased is because the price of gasoline is below $2 for the first time in over five years. Yesterday, I passed a gas station here in Houston where it was $1.69 per gallon.

The rapid decline in energy prices has boosted the US economy as it relates to increased consumer spending. The decline has also decreased expenses for logistics and travel companies that rely heavily on gasoline as a core way of doing business. Yesterday, Delta Air Lines, Inc. (NYSE: DAL) projected it could save more than $2 billion in 2015 over last year, citing lower fuel prices as the factor. Read more…

However, the impact isn’t as positive on the other end of the spectrum, resulting in energy stocks falling, budget reductions to 2015 exploration projects and thousands of layoffs.

With oil suppliers lowering their production rate, the dramatic drop in crude oil prices could be short-lived. Friday, the International Energy Agency (IEA) reported data that indicates supply may align more with the demand in 2015. Coincidentally, the same day crude oil prices increased about 2 percent.

According to the IEA Oil Market Report (OMR) for January, the oil selloff has cut expectations of non-OPEC supply growth by 350,000 barrels per day (bpd) since last month, to 950,000 bpd. It still reflects a significant increase in supply for 2015, despite crude futures at a six-year low.

The lower supply projections are due to WTI falling below $50 a barrel, causing U.S. oil rig operations to decline by 10 percent over the past month. A trend that is more than likely to continue if prices do not rise above $50 a barrel soon.

While the equilibrium between supply and demand will happen sometime this year, don’t expect it to happen in the short-term. Even if demand increase while supply slows, it’s likely the market will still be over saturated by the end of 2015.

Although companies have cut back on drilling and exploration, production will not stop at completed wells. Plus, OPEC is determined to keep its 30 million barrels per day output commitment intact.


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