Oil prices have largely stabilised over the last month or so with concerns regarding the oversupply situation seemingly easing within the markets. However, the period of stabilisation could prove to be short-lived with some experts predicting more pain around the corner.
One of the reasons the price has steadied recently has been the closure of several hundred oil rigs around the United States, with expectations of several hundred more to close. To many, that would suggest a pullback in production which would help balance the supply and demand in the market.
However, what many investors fail to recognise is that rig closures aren't necessarily indicative of a reduction in supply. What many energy producers are doing is closing down their higher cost rigs and instead focusing on their low cost rigs, possibly producing even more oil.
The fact is, data released by the Energy Information Administration (EIA) shows that crude inventory is sitting at an 80-year high with the United States recently recording its biggest weekly inventory rise in 14 years. Crude inventories are now sitting at 444.4 million barrels, which is more than a year's worth of production.
As reported by the Fairfax press, Jeffrey Currie, one of the world's most-respected commodities analysts from Goldman Sachs, believes US oil prices are destined to stay below US$50 a barrel for at least the remainder of this year. He also warned that prices could remain in the low US$40s for the next 12-18 months.
What this means for you
While low oil prices are obviously good news for consumers and net importing nations in the near-term, the long-term consequences are a cause for concern. Billions of dollars' worth of projects are being shelved or scrapped while workers are also being laid off from their jobs.
Low oil prices are also terrible news for energy producers such as Woodside Petroleum Limited (ASX: WPL), BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO), which all rely on higher prices for earnings growth. With oil prices having halved since July last year, each of these companies' shares have taken a beating and that would likely continue if prices fell further.
As it stands, Brent oil is trading at US$60.68 per barrel while West Texas Intermediate (WTI) is worth US$49.59. Until the demand and supply dynamics begin to balance out, expect the energy sector to remain volatile.
