The past nine months have delivered one of the worst slumps in crude oil price history.
Crude oil prices just closed their third consecutive quarter of declines. They've fallen about 47% in the last year and WTI currently hovers around $48 a barrel. The oil sector hasn't been this beaten down since the financial crisis of 2008.
The good news is oil prices have already bottomed out. They'll make a comeback in 2015 - but they won't return to the highs they saw a year ago.
"Oil prices will be going up, but hardly to the levels needed by the countries most dependent on oil revenues," noted Money Morning Global Energy Strategist Dr. Kent Moors. "In short, we're not headed back to triple-digit oil prices anytime soon."
While oil prices move higher, a new energy balance is developing at a rapid pace. Other sources like natural gas, renewables, and nuclear will garner larger shares of the energy market. Oil will remain crucial - but it will no longer rule the market like it did in past decades.
These three charts illustrate where the crude oil market has been - and where it's headed from here...
Crude Oil Price History Chart No. 1: Oil Prices vs. Natural Gas Prices
Natural gas and crude oil prices usually follow similar patterns because both compete for consumption. The two can be used for many of the same reasons - including electricity generation and petroleum production.
You can see the two mirror each other in the chart to the left. Both saw a bubble-bursting sell-off in 2008. This was due to President Bush's lifted drilling ban and the Lehman Brothers bankruptcy, among many other causes of the financial crisis. WTI plummeted 78.1% from $145.85 in July to $32 in December.
When discussing how much energy oil and gas provide, the price spread between them is significant. That's because natural gas consumers get a lot more bang for their buck...
A 2014 report by CME Group Inc. (Nasdaq: CME) said that $1 worth of natural gas - at a price of $5 per million British thermal units (BTUs) - can obtain 200,000 units of energy. On the other hand, $1 worth of WTI oil - at a price of $97 a barrel - can only garner 60,000 units. That's a 330% energy content price gap.
The reason for the disparity is how the two are traded. Oil is the world's No. 1 energy commodity, so its prices are exposed to geopolitical factors that can violently swing the price at any time. Meanwhile, natural gas prices are more stable because gas is difficult to transport overseas in its physical state.
But that limitation is about to be removed. The U.S. will begin exporting liquefied natural gas (LNG) later this year and will account for 6% to 8% of the global LNG market within five years. This will spike worldwide demand in natural gas, providing a nice pricing foundation moving forward.
Crude Oil Price History Chart No. 2: Oil Prices vs. S&P 500
A 2011 EIA report observed how oil price movement closely mirrored that of the S&P 500 between July 1 and August 19 of that year. During that period, WTI prices fell just over 13% while the index fell 16%. The reason for the similar pullbacks was the economic news at the time - notably a downward revision to U.S. GDP for the first six months of the year.
According to another EIA report, bullish expectations for the economy cause oil prices and S&P 500 returns to behave similarly.
"Since expectations for future economic growth also impact demand for crude oil, it is expected that there would be a positive relationship between the price of oil and the value of the S&P 500," the 2012 report noted. "In fact, there has been a significant positive correlation between daily percent changes of the WTI futures contract and daily returns on the S&P 500 in 14 out of 15 quarters since 2008."
Except that wasn't the case last year. The S&P 500 beat oil futures by about 47% in 2014. The index soared over the energy sector's losses as corporate earnings and employment data exceeded expectations.
Crude Oil Price History Chart No. 3: Where Prices Go in 2015, 2016
The questions on investors' minds remain the same - when will they rebound? And by how much?
The Wall Street Journal reported that most major banks see WTI closing the year between $52 and $84 a barrel. Brent crude, the global benchmark, has a similarly large range of $55 to $90.
In the United States, oil bears focus on excess supply. Oil stockpiles are at their highest in 80 years despite the rig count having fallen 44.6% in the last year. The U.S. dollar's increasing strength has also decreased the value of dollar-priced commodities such as oil.
But despite what many pundits believe, the world won't drown in oil much longer.
ING bank - one of the most bullish analysts of the oil market - asserts that the high inventories are only seasonal. Oil supplies increase in the first quarter because that's when many refineries close down for maintenance.
According to Dr. Kent Moors, oil will cost about $70 a barrel by the fourth quarter of 2015. That's because demand is starting to outpace supply as oil firms cut back on expensive deep-drilling activity. The International Energy Agency (IEA) expects worldwide oil consumption to increase from 910,000 barrels a day this year to 1.13 million next year.
"The most important [factor] is lower production in the face of continuing supply-side surpluses," Moors explained. "This will depend on the ability of U.S. operating companies to limit new projects of a certain type."
Stick with Money Morning for regular oil price updates and how to profit from them.
Bonus Content: Large parts of the growing energy markets were financed by high-risk "junk bonds." In fact, these issuances now account for almost 15% of the $1.4 trillion junk-bond industry. But now a wave of credit rating downgrades is hitting the sector. Here's how the volatile environment is dangerous for both oil companies and bond investors...
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