Will Oil Price Fall Below $80?

Includes: USO
by: Lior Cohen

During the month, the price of oil has declined by 7.5%. United States Oil (NYSEARCA:USO) also decreased by 7.3%. The decline in the price of oil in recent days may have had an adverse impact on energy companies' stock such as Chevron Corporation (NYSE:CVX). What could have caused such a sharp drop in the price of oil? Moreover, will oil prices continue to fall in the weeks to follow? Let's examine the recent developments in the oil market and try to figure what's up ahead for oil.

During recent months, the escalation in the Middle East including the tensions between Iran and Israel has had an impact on the price of oil. The recent threat of Iran to cut its oil exports could affect the oil market; if this threat will be executed, the price of oil may rally. Nonetheless the elections in the U.S and the recent decision of the Israeli Parliament to hold a general election by the end of January is likely to lower the odds of any action taken by Israel or the U.S. This could suggest the uncertainty in the oil market may rise once the Israeli elections will be over.


During the previous week, the U.S. oil stockpiles rose again by 5.9 million barrels and reached 1,070.1 million barrels. There is a negative relation between the changes in oil stockpiles (lagged by one week) and the price of oil. This relation suggests, assuming all things equal, the recent rise in stockpiles may adversely affect next week's oil price. The current oil stockpiles are higher than they were last year by nearly 37.5 million barrels. The chart below shows the development of the oil stockpiles and the price of oil between 2010 and 2012.


During last week, the U.S oil production rose again by 0.4% (week-over- week) and was also higher than the production level in 2011 by 12.3%; Refinery inputs also rose by 0.3%. Imports also hiked by 3.8% compared to the previous week. This means the oil supply continue to rise even if at a slower pace than in the previous weeks.

According to the recent OPEC report, the oil production remained nearly unchanged; although the oil production of Iran is at its lowest in recent years, the oil production rate has stabilized in recent months around 2.7 million bbl/d.


In recent weeks several reports were published that could offer some perspective regarding the growth of the U.S economy including: Philly Fed manufacturing survey, manufacturing PMI and U.S retail sales. These reports present a moderate growth in the U.S economy. Tomorrow's GDP report could also offer some perceptive as to the progress of the U.S economy during the third quarter. Despite the above-mentioned positive reports, there are still concerns for the growth of the U.S economy.

Europe continues to show little progress: the recent manufacturing PMI reached a 40 month low at 45.8, which means the Euro Zone manufacturing sector is contacting at a faster pace.

China, second largest consumer of oil, isn't showing much progress either. China's manufacturing sector has also contacted during the month.

On a global scale, the recent IEA report revised down its projection for the growth in demand for oil in 2012.

Therefore, the demand for oil in the U.S and other leading counties hasn't risen by much; the supply in the U.S has risen while the OPEC oil production remained nearly unchanged. This analysis suggests the oil market has loosened up a bit in recent weeks.

What's the bottom line?

The recent drop in the price of oil may continue in the weeks to follow. The elections in the U.S and Israel are likely to hold back any development in the Middle East, unless, of course Iran will decide to act on it threat and lower its exports; this scenario, however, doesn't seem likely considering Iran's GDP is mostly comprised of exporting oil. The stable OPEC oil production, the ongoing rise in U.S's oil supply, and the expected low growth in the demand for oil suggest the oil market has loosened and may continue on this path in the months to follow. My guess is that the price of oil will continue to dwindle to the low 80s in the weeks to follow.

For further reading see "Will Exxon Continue To Trade Up?"

Disclosure: I 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.