Will Oil Make a Comeback?

When Will Oil Prices Ever Return to Higher Levels?

Gas Pipeline from Fracking Well
Fracking Gas Pipeline. Steve Satushek

Will oil prices ever recover towards previous highs?  Yes. 

Will they increase soon?  No one can answer that.

However, there are a few notable price-drivers (beyond just straight supply and demand) which could influence prices.  Anyone who wants to trade oil, or buy and sell stocks linked to businesses in the industry, should keep an eye on these important oil influences and considerations.

China is Full:  

China has been aggressively filling their strategic petroleum reserves (SPR) with massive amounts of oil.

  Armadas of tanker ships, each holding a million barrels of crude, have been heading East to pump up China's "rainy day" oil reserves.  All the while the nation was constructing new and larger holding tanks.

Yet something just happened - China's SPR is near full, so that massive amount of demand will no longer be holding the market up.  Other countries, from Pakistan to Malawi are also quickly able to top up their national tanks at these prices.

U.S. Shale Oil and Fracking:

Much has been made about the U.S. shale oil boom.  However, with these depressed crude prices over the last few years, many of the projects either can not make enough to sustain their operations, or can not secure further financing.  In addition, most fracking wells use up the majority of their resource within the first year, and the output diminishes significantly from there.

Meanwhile, numerous wells are shutting down, because they are not feasible at current prices.

 According to Forbes, in the last week the land rig count fell by 37, while horizontal rigs dropped by 30, which represents the largest weekly decline since early in 2015.  Baker Hughes, which tracks total rigs in operation, shows a count of 664, which is a decrease of 1,086 from this time last year.

 

All this points to capitulation among drillers, caution from lenders, and significantly constrained supply.  While oil prices could keep falling, they will eventually bounce back when demand outweighs the continuously diminishing supply.

Iran and Saudi Arabia:

Tensions continue to escalate between these Middle Eastern neighbors, over religious and ideological divides, as well as the conflicts arising in Syria and Yemen.  The Saudi's have recalled their ambassadors, while shutting down all economic ties.  The Iranians burned down the Saudi embassy in Tehran, and responded in kind to the economic and diplomatic relations.

Short of all-out-war, the way Iran and Saudi Arabia can agitate one another is through dropping oil prices.  Each nation has been producing (or preparing to produce) to their heart's content, and they are both driving oil prices down indirectly (cutting off their nose to spite their face).  This puts pressure on both of their economies.

Countdown to 2068:

According to data from numerous sources, British Petroleum among them, the entire planet has only about 53 years of oil left, at current consumption rates.  The Official Oil Depletion Clock puts that time frame at 53 years, and 213 days.

While no one can know what the future holds, you can be relatively certain that oil prices will be depressed for a while.  However, it is exactly those depressed prices which will result in production cuts and increased usage.

Eventually, as can be seen in many of these top oil and gas blogs, that constrained supply will eventually result in a demand shortfall, and subsequently higher prices once again.

When wolves eat most of the rabbits and deer, they starve and die off.  Then, without predators, the rabbits and deer populations explode.  This is similar to what will happen with oil prices.