The price of oil is charging lower once again. Attimeof writing, Brent crude is trading at $55.06 per barrel, $6.30 above its five-year low of $47.80/bblprinted atthe beginning of this year.
Unfortunately, if the past few weeks are anything to go by, the price of Brent could push to a new five-year low in the next few weeks. Many analysts are predicting just that.
Supply/demand story
This week the World Bank downgraded its forecasts for global oil consumption over the next two years. At the same time, Saudi Arabia announced that its production had hit record levels, despite the fact that prices are in freefall.
Meanwhile, production of oil in the United States remain at 40-year highs. Even though oil prices are falling, shale producers continue to drill more wells, adding to the regions oil glut. On top of these factors, new supply from Iran could be about to hit the market. Its estimated that Iran could addan additional 1m barrelsof oil per day in supply to the oil market.
So all in all, its pretty clear that the oil market is oversupplied, and until supply begins to fall or demand rises dramatically, the price of oil will remain depressed.
Heading lower
City analysts believe that the price of oil could head lower by more than 20% from present levels, which would take it below $45/bbl. Other analysts have put forward the case that, for noticeable levels of supply to be taken out of the market, the price of oil needs to fall as low as $30/bbl.
Whatever the case, its widely accepted that the price of oil will fall to $40/bbl before heading higher again.
Not all bad news
For pure exploration and production companies, likeGenel Energy,Enquest,Tullow OilandPremier Oil,a low oil price is disastrous. However, for big integrated oil companies such asBP,Shell,TotalandExxonMobil, low oil prices are not a huge problem.
Indeed, as oil prices fall, refining margins are exploding with the average European refinery has reported a five-fold increase in profits over the past three months. Shell and BP have both reported four-fold increases in refining profits.
Refining arms, which used to be an afterthought for big oil, are now responsible for the majority of the industrys profit. Profits from refining contributed 80% of Shells and 73% BPs first-quarter net income, up fromaround 20% last year.
The bottom line
Overall, with supply outpacing demand, it doesnt look as if the price of oil is going to rebound any time soon. Unless demand starts to pick up, oil will continue to decline, and many analysts see the price falling to $40/bbl or even $30/bbl before the market begins to rebalance. Its inevitablethat some companies will go out of business along the way.
However, over the longterm, as the supply of oil declines and demand continues to increase, oil prices should head higher once again. The long-term investorhas nothing to worry about.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
