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These Two Factors Will Have a Big Impact on Oil Prices

By Matt Badiali, editor, Stansberry Research Resource Report
Friday, September 18, 2015

There's little agreement these days as to where oil prices are headed.
The 28% spike in prices earlier this month has some investors fired up about the sector again. But many other folks are bearish.
Goldman Sachs recently cut its 2016 forecast for West Texas Intermediate (WTI) crude oil from $57 per barrel to $45. The giant investment bank said prices could fall as low as $20 per barrel if the global surplus of oil doesn't come down. The oil price fell 2% on that news. These are the same folks who forecasted $200 per barrel in May 2008. Oil prices didn't get within $50 of that level. It did make for a good headline, though.
For the record, most oil analysts are making guesses. Trying to predict price trends in the oil market is much like trying to predict global weather patterns. There are simply too many variables that make up the "supply and demand" equation to arrive at an accurate forecast.
But there are two important factors that will have a big impact on oil prices in the near term...
The fact is that a weak global economy and a glut of supply will keep oil prices low for a while. The world has roughly 2 million barrels of extra oil per day, according to the U.S. Energy Information Administration.
But the oil market is a giant rubber band. It can only stretch so far one way, and only so far the other way. When prices get too high, the economy adjusts to use less. This lower demand causes prices to drop. When prices get too low, the economy adjusts to use more... many producers shut down uneconomical production... and prices rise as the supply/demand equation balances out.
That's just how the oil market works. So while oil prices could fall to less than $40 per barrel, they really can't stay that low for long. Too much supply becomes uneconomical and shuts down at prices that low.
There are two sources of supply I'm watching closely today – Iran and "stripper wells."
As we've shown you in these pages before, sanctions on Iran from the West will likely be lifted soon. If sanctions are lifted, Iran plans to produce as many as 1.5 million barrels of oil per day by the end of 2016. More oil flooding into the market would choke oil prices further.
However, low prices will likely reduce Iran's production volume. And it appears the Iranians are expecting lower oil prices. According to the international industry journal Petroleum Economist, Iranian economists are using a base price of $42 per barrel and a high price of $50 per barrel in their economic forecast for 2016. In other words, their "best situation" for 2016 would be an average oil price of $50 per barrel.
And there's another oil player that could soon affect oil supply – "stripper wells" in the U.S.
Stripper wells produce less than 15 barrels of oil per day. In the U.S., there are hundreds of thousands of these wells. These wells contribute about 11% of U.S. oil production. At low oil prices, these are easily shut down. Shutting down stripper wells would cut a million barrels of oil per day from the supply.
Removing a million barrels per day of supply would push oil prices up to the high end of Iran's economic forecast range.
How these two factors play out will have a big effect on oil prices in the near term. There will be a balance point, and I expect it to average somewhere between $45 and $60 per barrel over the next 12 to 24 months.
Now, these prices don't mean you can't invest in oil companies. We recently added an oil royalty trust to the Stansberry Resource Report portfolio. Just make sure you're choosing companies that can survive low oil prices for a while.
Good investing,
Matt Badiali

Further Reading:

"If you want to invest in the oil sector, conventional wisdom says Big Oil stocks like ExxonMobil, Chevron, and Royal Dutch Shell are the best way to do it," Brian Weepie writes. But buying these "safe" oil stocks is riskier than you think. Get all the details here.
In July, Brian showed how bankruptcies of oil and gas producers are actually good news for resource investors. "You see, for the sector to recover, struggling producers have to leave," he says. "Bankruptcies will help cleanse the market of higher-cost assets... or put them in the hands of more productive operators..." Read his full argument right here.

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