For over six months now, investors have been dealing with plummeting crude prices. The question in everyone’s mind is whether this is the right time to pour money into the industry. After all, most oil-weighted players are touching 52-week lows due to collapsing commodity prices.
However, there is a ray of hope, even in this weak crude pricing environment, for the downstream energy companies. As their earnings are negatively correlated to oil prices – the more the prices fall the better their profits will be – upcoming financial releases promise better bottom lines.
The 2014 Crude Selloff
The West Texas Intermediate (WTI) crude price lost momentum in June and has since then been showing weakness. This is primarily owing to plentiful North American shale supplies in the face of lackluster demand expectations, sluggish growth in China and the prevailing softness in the European economy. Strengthening of the U.S. dollar also impacted the demand for the greenback-priced crude, as it is now expensive for importers to buy oil.
Amid the soft oil pricing scenario, the international cartel of oil producers’ – Organization of the Petroleum Exporting Countries (OPEC) – stand against an oil output cut on Thanksgiving Day added to supply concerns.
We believe that the decision reflects the strategic move by Saudi Arabia − which holds the top spot in terms of total production among the 12 OPEC members − to get an advantage over U.S. shale producers. This is because shale oil, which has been witnessing large-scale production in the U.S over the last few years, is relatively expensive. Hence, in the environment of tumbling oil price, it will be difficult for U.S. shale producers to garner sufficient earnings to stay afloat in the industry.
Last week, OPEC also cut its 2015 forecast consumption by 280,000 barrels per day from its previous expectation, walking in the same track as U.S. Energy Information Administration (EIA) which trimmed its demand outlook for next year by 240,000 barrels per day.
Moreover, U.S investment bank Morgan Stanley recently gave a weak crude pricing projection as it does not expect prices to recover next year.
All these acted as dampeners, which dragged down the oil price more than 46% since June. WTI crude is now trading at $57.81 per barrel, the lowest level since May 2009.
The chart below indicates the price of WTI crude per barrel during the entire calendar year of 2014.