After another leg down for crude oil prices, some are convinced that the bottom is in for energy in 2015. But the direction that crude oil prices are headed in will surprise you.
Just look at what has happened lately for clear proof of that.
Roll back the calendar to a the beginning of May, where crude oil normalized above $50 after a snap-back in spring.
Energy stocks seemed to find firm footing once more as we neared the end of the second quarter, and many folks were talking about the wisdom of bargain hunting in Big Oil as a result.
By July though, all bets were off as crude tumbled sharply to near six-month lows, shedding about 20% in a matter of weeks. That once again puts oil prices within spitting distance of their 2009 lows.
Let that be a lesson to you about how crude oil prices behave despite investors’ best intentions.
The sad reality is that crude oil prices can — and probably will — go lower in 2015. Here’s why:
The U.S. is Still Producing Tons of Oil: Supply gluts persist despite the recent cutbacks in domestic oil production. Consider that, according to the U.S. Energy Information Administration, U.S. crude oil production will average 9.5 million barrels a day in 2015 — up significantly from 8.7 million in 2014. And while cutbacks will drop that output to 9.3 million barrels daily in 2016, according to EIA projections, that’s still well above 2014 levels.
… and So Is the Rest of the World: OPEC has refused to curtail production despite low prices and increased supplies from the U.S. That’s indeed partially because of nations like Saudi Arabia that want to punish competing U.S. shale oil companies in a big way on the global stage, but also because OPEC really has no other options but to keep pumping. Member states of the cartel need revenue to fund their governments.
Demand is Flat: Demand is falling even as supplies remain robust. The IEA projects that global oil demand growth peaked in Q1 of this year (in part thanks to super-cheap prices) and will slow across this year and into 2016.
Strong Dollar Headwinds Persist: The icing on the cake is a strong U.S. currency that is hovering around 12-year highs vs. other currencies thanks to loose monetary policy in Japan, debt troubles in Europe and general mayhem in China and Russia. A strong dollar acts as a cap on commodity prices, so even if supply and demand both right themselves — an incredibly tall order — they will have to overcome FX challenges to boot.
It’s tempting to think that crude oil has bottomed out, particularly if you are used to seeing the commodity priced at about twice these levels.
But crude oil can and will surprise investors by how low it will go, so don’t try to catch a falling knife here.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.