Trying to peg the bottom in oil is quite simply a guessing game. Still, with the gyrations and price swings, some investors have to wonder if the worst has been seen. After all, oil has fallen nearly 50% from the peak this summer. On top of many of the frequently covered issues around oil demand, new data highlights just how much the strong U.S. dollar and the increased U.S. production have been key contributors to the latest drop in oil prices.
24/7 Wall St. showed what the latest bounce may mean to the top oil giants. We have also recently highlighted the world’s top 10 oil companies to see which companies might have the most to lose from low oil (and gain in a recovery).
There are a few obvious things to consider this week, into year-end and going into 2015. The first and most obvious outcome of lower oil is that the growth of U.S. oil production will certainly slow. Whether total production, rather than the growth of production, formally contracts is another discussion entirely. The good news is that the timing of this slowdown will not be immediate.
Another thing to consider is whether this drop in oil prices will truly be good for America. U.S. oil jobs are high paying, and they have a better broad economic footprint than restaurant or many other jobs.
Moody’s analytics has released an assessment of oil and a directional call for 2015. 24/7 Wall St. has also seen other oil and gas players make calls on their views for 2015, such as Encana and GE.
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A fresh report from Chris Lafakis, senior economist at Moody’s Analytics, addresses the currency impact and U.S. production impact along with the drop in oil demand. Lafakis said:
Approximately half the $40 per barrel decline in crude since the summer can be attributed to rising production. Since June, the U.S. and Libya alone have increased production by 1.2 million barrels per day, equivalent to 1.3% of global crude oil supply. These new supplies have come on line at a time when oil demand has slowed. The International Energy Agency has cut its forecast for global demand in 2015 by 700,000 barrels per day. About 30% of the decline in oil prices can be attributed to weaker than expected demand.
Lafakis also went after the currency impact and the rising supply with formal figures in the Moody’s Analytics report. He said:
The rising U.S. dollar is the third major reason why oil prices have fallen so much so fast. Since May, the U.S. dollar has appreciated by 13%, accounting for 15% of the drop in oil prices. Reductions in geopolitical risk explain the remaining 5% of the decline… Rising global supply has been the principal factor pushing oil prices lower, and no country has contributed more to the glut than the U.S. According to the IEA, the U.S. has surpassed Saudi Arabia and Russia in oil production when condensate and natural gas liquids are included. The U.S. shale boom has been underpinned by high oil prices, abundant financing, and steady productivity growth.
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So, is a bottom coming closer to fruition? Maybe. Moody’s Analytics has lowered its oil price forecast due to the reasons stated above. Still, prices are still expected to trend higher in 2015 — with West Texas Intermediate (WTI) crude projected to average $85 per barrel and Brent crude closer to $90 around this time next year. The reason: lower prices will reduce investment in exploration and production while encouraging greater consumption, eventually boosting prices. In short, lower prices help cure lower prices.
A last view from the Moody’s Analytics report is that the $40 per barrel drop since June represents about $120 billion in spending and will be rechanneled from energy to other goods and services over the course of the year.
So, back to who else has changed their oil price forecasts and/or production expectations for 2015.
Encana Corp. (NYSE: ECA) recently increased capex plans despite lower oil prices and despite a lower forecast. Encana is now assuming that WTI crude will average about $70 per barrel in 2015. It had previously assumed an average of $95.
General Electric Co. (NYSE: GE) said on Tuesday that its new guidance of $1.70 to $1.80 in earnings per share would be $1.10 to $1.20 per share from industrial, with another $0.60 per share from GE Capital operations, for a total of $1.70 to $1.80 in 2015 earnings per share (versus $1.79 from Thomson Reuters). While Jeff Immelt said the rest of the company looks fine, the conglomerate is trimming costs at the oil and gas unit, but it sees breakeven to slightly negative in oil and gas amid a capex freeze.
CIBC recently lowered its Brent crude forecast to $80.50 for 2015 (its forecast had been above $100 just in September). The WTI forecast for 2015 was cut to $73 from its earlier forecast of $98.
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