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Are oil prices headed back to $30?

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By Johnny Bevers, Editor,

With the botched OPEC deal in Doha now in the books, are oil prices headed back down to $30 or below?

While it’s true that the oil glut seems to persist in its nastiness, US oil production is down month over month; and has been in a precipitous decline of roughly 100,000 bpd each month since last October.  This persistent low price environment has caused many oil producers to file bankruptcy to write off, or exchange debt for equity.  The most recent (sizeable) bankruptcy involved Energy XXI who filed in a Houston court last Friday.  Hercules Offshore also fell victim when demand for their drilling rigs tanked last Fall.

Meanwhile, countries like Iraq and Iran have increased production volumes in hopes of regaining market share with Saudi Arabia holding steady at around 10.2 Mbp/d.  Middle eastern producers, as the lowest cost producers, are carving out their market share while the rest of the oil producing world muddles their way through the minefields of cost reduction and efficiency.

Citi is estimating fairly stable prices hovering around $40/barrel for the rest of this year, and some are predicting increases heading into the latter part of 2016 as supply and demand come into equilibrium.  CAPEX budgets have been slashed across the board at most major oil producers in an effort to preserve capital and “ride it out.”

We now believe OPEC will no longer intervene to support price.  It’s not in their interest to do so.  They will produce as much as they want, and the rest of the world will get to produce the rest.  That really is the bottom line here.  Until OPEC reaches full capacity, prices will be very slow to recover.  They will recover, but it’s going to take some time.  At least 6 months, but maybe longer.  If you’re an investor, you’ll have to wait it out.  If you’re a natural gas investor, the wait may be a little shorter lived.  Natural gas could recover a little sooner because of an apparent “La Nina” may be in the making to deliver a very cool winter in the Fall of 2016.  In addition, natural gas rigs have gone to their lowest levels in 30+ years and demand signals are increasing daily in both energy consumption, exports to Mexico, and LNG exports provided by Cheniere Energy.  Natural gas may be a better, near-term, play.

There may be a “spike” in the making for oil though…  As CAPEX budgets are cut outside of OPEC, the rest of the world may not be able to pace demand.  Again, if you’re an investor, stay tuned.  Watch global events and be ready to place your bets!

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