Oil has been on a long-overdue tear lately. Prices have gained 17.5% in the last month. On Wednesday, they reached $62 a barrel for the first time since December.
The rally reinforces our crude oil price predictions that WTI and Brent will rebound throughout 2015.
While the long-term oil price trend is up, there will be bumps along the way.
“Oil’s trajectory is shaping up to be in a ‘ratcheting’ pattern,” explained Money Morning Global Energy Strategist Dr. Kent Moors. “This is the term I have used for years when referring to a pricing adjustment that is moving up overall but with intermittent declines and bouts with volatility.”
Take a look at why our crude oil price projections see oil hitting $80 in 2015 – plus find out the best way to profit from this rebound…
What’s Fueling the Crude Oil Price Predictions for 2015
Oil prices are recovering from a bad first quarter. Oil supply skyrocketed to levels not seen in 80 years. That dropped WTI about 15% during the first three months of the year while Brent fell about 6%. Prices were their lowest since the financial crisis.
But oil futures have had a great second quarter so far. WTI futures climbed 23.5% since March 31. They soared 14.3% in April alone, marking the largest one-month gain since June 2014.
The good news is that prices will keep moving higher. A number of factors, including lower supply and increased M&A activity, will create a new energy landscape.
“A confluence of production restraints by operators, drawdowns from storage, and increasing competition among sources will emerge as staples of the new supply-demand balance,” Moors noted.
For months, the Energy Information Administration (EIA) and International Energy Agency (IEA) released supply reports that hit crude oil prices. Production skyrocketed past analyst expectations week after week, and the price of oil kept falling.
But when the talking heads on TV analyzed these reports, they missed one important fact about U.S. oil production …
It has to do with the lifespan of an unconventional (shale and tight oil) well. These wells have an average production curve of a year and a half. Considering how the price crash started last June, these wells will decline by mid-summer.
Meanwhile, low oil prices have caused M&A to sweep the industry.
Royal Dutch Shell Plc. (NYSE ADR: RDS.A) just acquired BG Group Plc. (OTCMKTS ADR: BRGYY) in a $70 billion deal. It’s the largest merger in over 10 years and makes Shell the largest producer of liquefied natural gas (LNG) in the world.
It’s also happening among master limited partnerships (MLPs). Energy Transfer Partners LP (NYSE: ETP) bought Regency Energy Partners (NYSE: RGP) for $18 billion. Once the deal closes, ETP will be the second-largest MLP on the market.
Here’s where we specifically see oil prices in 2015…
Crude Oil Price Predictions for 2015
According to Moors, dwindling supply and M&A activity will push crude oil prices toward $60 to $73 by mid-summer. They’ll be in the low $80s range by the end of the year.
In other words, their momentum will build slowly throughout the rest of the year.
“A number of factors are emerging that indicate oil prices will be going up, but hardly to the levels needed by the countries most dependent on oil revenues,” Moors noted. “In short, we're not headed back to triple-digit oil prices any time soon.”
The main factor hindering $100 highs is the leveling effect of unconventional oil’s international availability.
Right now, the level of profitability without hedging U.S. producers is roughly $75 to $80 a barrel. Once prices approach that range, more unconventional oil production will kick in. Unless a geopolitical crisis occurs, that production will keep a lid on additional price increases.
Crude oil prices have a long way to go. In the meantime, Moors recommends oil dividend stocks that will boost returns until prices fully recover.
Three Big Oil stocks with solid dividends are BP Plc. (NYSE: BP), Shell, and Chevron Corp. (NYSE: CVX). Each has a respective dividend yield of 5.74%, 6.05%, and 3.98%. They’re also large enough to benefit from ongoing M&A activity this year.
What do you think about our crude oil price predictions? Talk to us on Twitter at @AlexMcGuire92 and @moneymorning.
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