Crude oil prices won't see $60 anytime soon and in fact might not even get to $50. The fundamental picture for crude tells a story of a commodity that is headed back to the $30s. The current drawdown when analyzed should be credited to the weather rather than an uptick in demand.
Hermine, the storm that first plagued the Caribbean and Florida before moving into the gulf, caused a huge disruption in production and supply. Some estimates had over 25 percent of gulf oil production taken off line and millions of barrels imported from overseas had to wait out the storm before delivering their cargo.
Since production and supply routes have reopened, it's likely that next week's numbers will show a substantial build in supplies. In fact crude oil supplies have built consistently over the last few months and will continue to do so at least until the end of this one.
There has been continued chatter about an OPEC freeze in production which is unlikely to happen when members meet at the end of the month. There is animosity between some OPEC members, namely Saudi Arabia and Iran, and all of them have to pump as much oil as possible to pay the bills. And let's face it, how would any production freeze be verified?
What Russia and OPEC have agreed to is to form a working committee to study the issue –in other words they've agreed to talk more. And if there was a freeze—the world's third largest oil producer (the U.S.) would not be a part of it. A freeze would put OPEC production at about 2 million barrels above its quota, the U.S. is still producing over 8 million barrels per day, Libya and Iraq are producing more and the list goes on.
It's easy to understand that the world produces much more oil than it uses. There is talk of increasing demand, but in the U.S., the economy is growing at below 2 percent, Mario Draghi downgraded growth for the European Union on Thursday and the outlook for China is weaker. Where will the demand come from?
The fourth quarter and the beginning of the first are times of low demand for oil and this year is no different than last: the Fed is promising to raise rates and if it does, it will cause a worrisome drag on the economy—remember last year when the Fed raised rates in December, the dollar spiked and oil fell.
There is more oil being produced today around the world than last year at this time and economies are doing pretty much the same; it's the perfect recipe for oil to trade in the mid 30s before the year is out.
Lastly there are experts who feel the drop in capital expenditures will hurt production—if that is true it's not showing in the numbers as most countries are able to produce even more. We are still a long way from demand overtaking supplies.
