How Oil Prices Can Increase Faster Than We Ever Expect?

| About: The United (USO)

Summary

In spite of an existing oil glut, oil prices can increase faster that any one expects.

Demand Will Overtake Supply In The Coming Time.

International Energy Agency (IEA) expects that global oil supply will fall in the second quarter of 2016.

Oil prices increased slightly on Wednesday as the American Petroleum Institute (NYSEMKT:API) reported a drawdown of 1.3 million barrels in the U.S crude oil inventories. Last week, API had reported a crude oil inventory drawdown of 800,000 barrels. The WTI (WTI) and Brent were trading at $39.55 and $41.77 at the time of writing this article. Although oil prices may increase marginally because of bullish API data, the existing crude oil and gasoline glut will offset these gains in the coming time. Moreover, if EIA comes up with a bearish crude oil data, prices will fall even further. In fact, even OPEC's reference crude oil basket price fell below $39 for the first time since 2004. Amid all these bearish developments, I have some bullish news on oil (NYSEARCA:USO). I firmly believe that in spite of an existing oil glut, oil prices can increase faster that any one expects.

Demand will overtake supply in the coming time

As the effects of supply disruptions from Nigeria and Canada have faded away, it seems that global supplies (for both crude oil and products) are increasing at a rapid pace. The U.S gasoline inventories are currently at their highest seasonal levels since 1990, global product demand still remains weak and there is a clear oversupply of refined products in Asia. Even Russia and Saudi Arabia dominated OPEC are producing oil at substantial levels. And then, there is China that is flooding the Asian markets with Gasoline and Diesel. Considering all these factors, many market analysts and investors believe that oil prices will continue to fall in the long run. However, these people are not looking at the complete picture. Yes, it is true that oil inventories are currently at unprecedented levels. But, what about the rising capex cuts by oil majors? According to a prediction made by Oslo-based Rystad energy, global oil and gas investments in 2016 will stand at around $522 billion which will be the lowest in last six years. In one of my previous articles, I had mentioned that oil majors like BP (NYSE:BP), Statoil (NYSE:STO) and Total (NYSE:TOT) require oil price to be in the range of $60 for balancing their books. Even oil field services companies like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) require a higher break- even price to increase their operations substantially. In fact, a recent Wood Mackenzie report revealed that almost all oil -producing countries have reduced their capital expenditures since 2014's oil bust and global capital expenditure will reduce by 22% (almost $1 trillion) between years 2015-2020. In fact, some analysts now believe that this capex reduction will have a major impact on global oil supplies, and its effect on oil prices will be seen by next year. Even new oil and gas discoveries have fallen to a 20 year low level. IHS has even stated that this is the longest decline in last 65 years.

Takeaway

The International Energy Agency (IEA) has recently reported that global oil supply will fall in the second quarter of 2016. On one hand we have a case of falling global oil and gas investments and discoveries and on the other; we have countries like China and India that will drive the global oil demand in the coming time. I do believe that oil prices can fall even further because of weak demand growth and crude- product glut. But I am confident that oil prices will increase in the longer because of the above factors. Long term investors in ETFs such as USO must hold their investments at this moment.

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

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