Unless you have been living under a rock, you know that oil prices are way down, as you can see prices at the pump drop to the $2 range.  Crude continues to get pounded, as over supply and lack of demand continue to plague the economic situation for black gold.  Front month futures contracts of oil have it priced at $63.275 a barrel, as the price is getting a temporary rally due to a sizeable US dollar correction.  Sterne Agee analysts see oil back up to $75 a barrel once E & P sentiment can rebound and price sees a squeeze from the negative sentiment.

Oil Momentum

Oil rig count affects the prices

One major factor that affects price of oil is the US rig count, which is seen as a US oil production barometer.  Despite warnings and falling profits from oil producers here in the US, we have not seen the rig count really fall and correct to give oil some breathing room from falling.  Last week, data showed US rig count at 1,575 rigs and the average for 2014 has been 1,579.  Being that the rig count is still near 2014 average, Sterne Agee analysts think that this will help keep oil prices low through first quarter 2015.  Companies are using three way collars to hedge oil in 2015, but Sterne Agee analysts say this will not help companies out, but rather hurt them.  Additionally, Sterne Agee does not see mergers and acquisition activity to pick up significantly.

Crude production

Crude prices to rise to $75 a barrel by the end of 2015

Sterne Agee analysts say they believe oil will be back at $75 a barrel by the end of 2015, but the bottom is not yet in.  Rig count staying stable, production estimates relatively unchanged, and continued overall bearish standing on oil are all factors that are leading oil lower, according to Sterne Agee.  I would add that OPEC’s lack of an action plan has really created another big leg lower in price of oil.  Oil bulls were relying on OPEC to stop the bleeding and attempt to stabilize the price of oil, however, the cartels’ meeting in November revealed a “wait and see” attitude, which sent oil reeling.  Oil companies are not properly hedged for next year’s lower oil prices and this will likely hurt as the current hedges only cover so much and losses still mount for oil producers.

Crude prices

Sterne Agee says that the continued oil weakness could lead to a rise in bankruptcies in oil producers, most likely into 2016.  The smaller and independent oil companies will definitely be hit the hardest and certainly face a higher chance of bankruptcy than some of the larger oil giants.  However, even the oil giants are getting nervous and have begun to announce big cost cutting initiatives to help save earnings the best that it can.  Overall, oil appears to continue its weakness into next year, with 2016 being the potential revival year for oil to climb back into the 80s-90s.  Until then, we ask ourselves, how low can oil go?

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