Crude oil prices
January WTI (West Texas Intermediate) crude oil futures hit December 2008 lows on December 11, 2015. US crude oil prices fell for the sixth day in a row. The price trend suggests that the worst is yet to come. Iranian and Saudi Arabian production are weighing on the crude oil market.
The critical support level for crude oil prices is $34 per barrel. Prices tested this mark in December 2008. Iran, Iraq, and Saudi Arabia will likely drag crude oil prices to record lows. Record-low crude oil prices could delay Iran’s decision to scale up production. If oil prices continue to fall, there’s a chances that oil producers might halt new oil production plans in Iran. Even Saudi Arabia could curb production if its senses that US counterparts are out of business because of record-low prices.
Oil prices need strong fundamentals to recover. Crude oil prices could experience a relief rally due to short covering ahead of December WTI crude oil contracts’ expiration because of record short positions.
Massive expenditure cuts
Lower oil prices have led Chevron Corporation (CVX) and ConocoPhillips (COP) to curb planned expenditures by 25% in 2016. Rystad Energy estimates that $250 billion in spending was cut in 2015, and it expects $70 billion to be cut in 2016. The whopping $320 billion in expense cuts should lead to a massive drop in oil production over the long term. Also, lower oil prices make recovery of crude oil reserves economically unviable.
Thus, we could see crude oil reserves vanish from oil companies’ books. Chesapeake Energy Corporation (CHK) has 1.1 billion barrels of crude oil on its books. However, because of the exponential fall in crude oil prices, these reserves are no longer technically recoverable. Hence, we could see a fall in crude oil reserves in the next quarterly announcement.
This phenomenon could affect the stock values of even larger oil players, and the effect of poor stock performance will have a ripple effect on the broader stock market indices (SPY).
The EIA (U.S. Energy Information Administration) estimates that Brent crude oil prices could average $53 per barrel in 2015 and $56 per barrel in 2016. Likewise, US crude oil prices are expected to average $49 per barrel in 2015 and $51 per barrel in 2016. Citigroup expects US crude oil prices to average $48 per barrel in 2015 and 2016. It expects Brent crude oil to average $51 per barrel in 2016.