Share This Article
We Followed the "Smart Money" Right to This Small-Cap Stock – Again
If you’re looking for a “Buy” signal, there’s one indicator that trumps all others.
How would you like to put an extra $125,000 in your nest egg? You can potentially do it this year - and you'll only have to risk $20 to learn how. Click here.
Email this Article
Why Crude Oil Prices Will Climb in 2016
According to Money Morning experts, the oil price crash is coming to an end in 2016.
Despite crashing more than 70% since June 2014 highs, a bottom is near. Oil prices will slowly begin to climb again this year.
WTI crude oil prices have hovered near $30 per barrel through 2016 after dropping nearly 40% in 2015. Brent crude oil – priced in London – had an even worse year in 2015, falling 44.2%. In fact, 2015 was the worst year for oil prices since the financial crisis of 2008.
But Money Morning experts expect the price of crude oil to gradually climb by the end of 2016 and through 2017.
Before we get to why crude oil prices will begin rebounding, let's look at why the price of oil fell so dramatically in 2015 and through early 2016…
A confluence of bearish factors caused the recent oil price crash.
First, global oil supply has been at an 80-year high throughout 2015 and early 2016. And these supply issues have been exacerbated by new concerns that OPEC will continue adding to the global supply glut.
Then there's demand. The International Energy Agency (IEA) released a bearish report in January 2016 stating that soaring OPEC production will keep yearly global demand growth for oil under 1.2% through the year. Cartel-wide output jumped 280,000 barrels to a total of 32.6 million last month.
"Persistent speculation about a deal between OPEC and leading non-OPEC producers to cut output appears to be just that: speculation," the IEA report stated.
Another reason for the oil price crash is slowing demand in China. China is the world's second-largest oil consumer, behind the United States.
The China demand problem became clear in November when oil imports in China fell by 218,000 barrels per day to 20-month low. Overall demand that month hit 732,000 barrels per day – down 9.9% from the same month in 2014.
A third major reason that crude oil prices have been falling in 2016 is the lifted Iran sanctions.
On Jan. 16, the International Atomic Energy Agency (IAEA) confirmed Iran has scaled back its nuclear research – complying with the terms of the nuclear deal struck last July. The terms included reducing its uranium stockpile to 300 kilos or less and allowing IAEA spot inspections of Iranian nuclear sites.
In exchange for reducing nuclear activity, the UN will lift sanctions that target Iran's defense, shipping, and most importantly, oil industries. The OPEC country will now be allowed to ramp up oil exports, which analysts believe will add up to 500,000 barrels of oil a day to the already oversupplied market.
While those three major incidents have all contributed to a global oil price crash, Money Morning Global Energy Strategist Kent Moors says that oil prices have found a floor. And he sees oil prices climbing through 2016 and 2017. Here's how much…
While oversupply and falling demand in China have been major contributors to falling oil prices, Moors points out that global oil demand continues to rise at a steady rate.
The U.S. Energy Information Administration (EIA) expects global consumption to rise from 93.8 million barrels a day last year to 95 million this year. And the agency also expects that number to hit 96.5 million through 2017 – marking a 2.9% increase from 2015.
This long-term demand growth will reduce the worldwide glut and raise prices to the $70 range by next year.
While demand rises, output is also expected to drop this year.
You see, the average oil well produces most of its volume within the first 18 months it is online. The majority of U.S. oil wells are now starting to see a drop off in production. That makes sense considering the oil price crash has been going on for about 18 months.
"The U.S. rig count has declined precipitously… that can't help but lead to a drop in supply, especially when it comes to shale or tight oil," Moors said. "It's called the decline curve and can't be finessed forever."
And there is a third reason to be bullish on crude oil prices in 2016 and 2017…
The current low oil price environment is ushering in a wave of M&A activity that will stabilize the oil sector by making it leaner and more consolidated. This will lower the number of U.S. producers and birth a new group of heavyweight companies that will strengthen prices.
"The specific objective of M&A may vary from deal to deal, but the overall goal remains the same: to streamline participation in advance of sector stabilization and the inevitable rise in raw material prices," Moors said.
In fact, we've already seen the M&A wave with the Shell-BG Group and Schlumberger-Cameron deals…
On April 8, Royal Dutch Shell Plc. (NYSE ADR: RDS.A) acquired BG Group Plc. (OTCMKTS ADR: BRGYY) for $70 billion. The deal is the largest energy merger in more than a decade and will create the world's largest producer of liquefied natural gas.
"The Shell-BG [transaction] is the first clear megamerger option crossing the oil-gas division," Moors noted back in April. "We will see more of these as the new energy balance among a widening number of energy sources kicks in."
The slow and steady price rebound will offer us strong profit opportunities in the meantime.
"We are not racing back to $100 a barrel oil," Moors said in December. "But we certainly do not need triple-digit oil to make some nice investment returns, especially in a sector that has been so oversold."
Stay tuned to Money Morning for everything you need to know about crude oil prices, crude oil price predictions, and how to invest during a low oil price environment…