Crude oil prices are now below $35, as measured by West Texas Intermediate pricing. And at $36 or so, Brent crude oil prices aren’t much better.
That puts energy prices at their lowest level since 2004 — lower, even, than the rout on crude oil seen during the Great Recession.
The pain for commodity traders has been severe. Oil prices are down 30% from their October highs and down 40% since January. Worse, the price of crude is roughly a third of what it was in the summer of 2014.
Funds benchmarked to crude oil prices have been suffering in kind. The United States Oil Fund ETF (NYSEARCA:USO) is down over 45% since the start of the year.
There are good reasons for these painful declines. And some things will get worse before they get better.
Crude Oil Demand to Stay Weak
It is undeniable that China is a huge energy user. In fact, China is the No. 1 consumer of overall energy on the planet and the No. 2 oil consumer behind the U.S.
However, the level of China’s energy demand is going nowhere, and in fact some estimate that “China energy demand may not increase until 2017.”
At the same time, a combination of a weak economy in Europe and a big push for energy efficiency means demand is also declining across the eurozone. The latest GDP numbers were disappointing, with a measly 0.3% growth rate for the EU at large.
In fact, the International Energy Agency’s global demand report for 2016 predicts that “previous price support is likely to wane” thanks to global pressures.
These are durable trends that are not going away — perhaps not for a year or two.
Production Strong Despite Low Crude Oil Prices
Absurdly, even in the face of this rather bleak outlook for demand, OPEC is maintaining its record rate of oil production.
In fact, OPEC’s November production of 31.7 million barrels per day was its highest output in more than three years.
That’s partly because certain member states are incredibly dependent on oil revenue to run their governments, and ironically that means selling even more oil these days to generate the same amount of cash for their coffers. It’s also partly because OPEC powerbroker Saudi Arabia is hell-bent on maintaining market dominance and putting the screws to U.S. producers by keeping prices low and margins thin.
And while U.S. oil production hit a one-year low recently thanks in part to recent price declines, some analysts have warned that drillers — particularly those in the shale space — are poised to pounce at the first sign of a modest recovery in prices.
In other words, while production has dipped in the short-term, it will quickly ramp back up to capitalize on any rebound in crude.
Amid this downtrend, it’s clear that the pain isn’t over for crude oil prices or oil ETFs. While it’s fashionable to call a bottom in crude, there is too much working against oil stocks to make them worth the risk.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.
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