Will Oil Prices Keep Falling?

by: Lior Cohen


Oil prices shed 0.3% off its value.

Oil production is expected to keep coming up in the U.S.

Oil supply is expected to remain higher than oil demand in the coming months.

The oil market cooled down in the past several weeks, as the price of WTI oil reached $95 at one point last week. The United States Oil ETF, LP (NYSEARCA:USO) also fell down in the past few weeks. Looking forward, will crude oil prices continue to fall? Let's see what could keep bringing down oil prices.

Global production expected to rise

Based on the latest OPEC's monthly report, during July, OPEC oil production rose by 166 thousands of bbl/day mainly due to higher production in Libya and Saudi Arabia, which more than offset the modest drop in Iraq's output. So even though the current situation in Iraq is still in dismay - the recent news is that Kurds and Iraqi forces took over Iraq's largest dam from Islamic militants - the turmoil in this region has yet to negatively impact this country's output.

OPEC's production was 29.9 million bbl/day, which is inline with OPEC's quota.

At the same time, oil production of non-OPEC countries slightly declined during July, but the output is still up for the year; it is expected to rise by 2.6% during 2014, year over year.

U.S. production continues to pick up

On a local scale, the U.S. Energy Information Administration reported that since the beginning of the year oil production in the U.S. rose by 4.2% and by 12.5% compared to last year.

Click to enlarge

Source of data: EIA

Looking forward, oil output is projected to rise by 9.5% to 9.3 million bbl/day in 2015. In the meantime, the higher oil production is likely to keep easing down oil prices. Further, based on the Baker Hughes' latest weekly update, the oil rotary rig count rose by 1 rig to reach 1,589 rigs - they are up by 13% compared to last year. The increase in oil rigs is mostly due to the shift from natural gas rigs to oil.

Growth in global demand was revised down

The International Energy Agency recently published its monthly update, in which it has revised down its 2014 projections for the global oil demand to 1 million bbl/day due to lower GDP outlook by the IMF. This lower growth rate is likely to keep the supply higher than the demand.

Source of data: IEA and EIA

The chart above shows the quarterly changes in the supply to demand gap (if the gap is positive, the demand is lower than the supply). As you can see, the gap is expected to remain high enough to bring oil prices further down in the coming months.

The potential drop in oil prices could also bring down the profit margins of oil producers including Exxon Mobil (NYSE:XOM) and Chesapeake Energy (NYSE:CHK).

In conclusion

Oil prices could keep coming down as long as the tensions in the Middle East won't lead to any potential change in the global supply. Finally, the revised down global demand for oil is also likely to ease down oil prices to the low $90s. For more see: Is This Oil Company Recovering?

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.