Oil - How Low Can It Go?

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Includes: OIL, USO
by: Dutch Trader

Summary

The lifting of Iran's sanctions is a important step towards a better world.

But what does it mean for the oil price going forward?

A US production decline could be laying the ground for a recovery in the oil price.

OIl down The lifting of Iran's sanctions is a important step towards a better world.

For the people of Iran but also for the rest of the world. Economically, Iran will benefit.

The big question pundits, economists, forecasters and investors are asking what does it mean for the oil price going forward?

Iran says it will be able to hike sales by 500,000 barrels the day and increase their total exports to approximately 2.5 million barrels within the next year.

This hike is great news for most of us because the oil price could go much lower than it is already. It is devastating news for people working and investing in the oil industry. Because more job cuts can be expected. In November 2015, industry consultant Graves & Co. already mentioned that the number of jobs gutted from oil and gas companies around the world passed the 250,000 mark.

Investors are afraid that Iran's full return to the war could provoke a price war with Saudi Arabia and other Middle East countries because Iran plans to offer discounts to win back customers.

Investors have felt the pain many energy companies and MLPs in the energy and gas sector have collapsed in price. With oil prices stalling at $35/barrel oil, the majority of energy companies operate cash flow negative and are therefore burning through cash and other forms of liquidity such as bank revolvers and term loans.

It is just a question of time when the first defaults are coming to fruition.

According to ZeroHedge, the following companies could be in jeopardy because of tightening liquidity. The fact that the borrowing base is reduced on existing credit facilities could lead to defaults going forward.

Tracking the number of defaults the coming months could be an indicator that the oil price is nearing the bottom or has already bottomed. A US production decline could be laying the ground for a recovery in the oil price.

For now, everyone is looking to Iran. But only the real fundamental picture in some quarters can tell us if we have seen the worst.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.