Crude Oil prices have been in a freefall since August, as overproduction and lack of demand continue to pressure prices and create a supply glut.  In the beginning of August, oil was trading just below $100 a barrel and we have seen an extensive sell off to its current price of $73.54.  Commitment of traders show that commercial hedgers and large traders are liquidating positions, as concern mounts over where prices could go and the over excess supply.  However, being that oil has a traditionally strong winter seasonal performance, it is entering a seasonally strong period.  That being said, with prices weak during this time of year the consumer really gets a break.  As the holiday shopping season is only days away from officially opening, lower and cheaper oil prices will allow consumers to go out shopping much more cheaply.  According to Sterne Agee, consumers will have the treat of lower oil prices for next couple of years, as the company lowered full year price targets for 2014-2016.

Crude Oil
Finviz.com

Sterne Agee’s estimates for WTI crude oil price

Originally, Sterne Agee estimated that WTI crude oil would close 2014 at $96.50, $90 in 2015, and $90 in 2016.  The newly revised price targets include 2014 target of $95, $81 in 2015, and $81 in 2016.  The company says they expect limited OPEC response to falling oil and a lack of action plan to really turn around the price slump. Agee is forecasting a 12% increase year over year in US oil production, despite falling prices.  Additionally, Sterne Agee has issued a warning that sub-$85 oil will have an impact on rig count next year.  Analysts say that oil producers have some strong hedge positions in the market right now, which could limit number of rigs shutting down, but if oil was to continue below $81 in 2015-2016, Agee expects to see a sharp fall in rig count as lack of profitability and stable hedge hurt producers.

Crude Oil

Crude Oil

Oil majors can withstand a crude oil price fall, but what about small companies?

Overall, it is the smaller oil drillers, explorers, refiners, etc that will get hit the hardest.  Oil is around $73 barrel currently, and while the oil majors are large enough to withstand a price fall, the smaller oil companies may have a harder time.  We could see a rash of mergers and acquisitions or smaller oil companies close their doors because it is not profitable for them to drill or operate.  Investors in small oil stocks need to take another look and try to decipher the impact the company is facing and what their plans are to make up earnings elsewhere.  Strong US oil production, weak demand, supply glut around the world, will only lead to further lower prices and it appears we could be living in this environment for next couple of years.

Disclosure: No positions