The Market: Crude Futures to $30/barrel and Gasoline below $1.70/gallon soon

The energy industry is praying for a rebound.

Let me restate that: the U.S. energy industry is praying for a rebound. Unfortunately, they are going to get hit even harder than they thought after crude had hit $40/barrel from over $110/barrel just five months prior. See, here is the current status. Energy and drilling companies in the U.S. are relying on crude future prices to rebound or they are going to have to further cut drilling and operation expenses which include massive layoffs. This is a tough nugget to accomplish, since many drilling companies rely on paying back debt they have incurred to fund their drilling operations and acquire land to drill on. They need to keep drilling, to pay their bills or they will go bankrupt. It is a big problem and it is not going away anytime soon. The energy industry is currently in the bottom of the ninth inning, down three runs with bases loaded. The only thing that matters right now is the pitcher, the person who controls the ball. The pitcher is the U.S. Dollar and Supply.

The U.S. dollar strengthening over the last year has furthered the acceleration of the decline in crude prices. I do not see the U.S. dollar weakening any time soon thus furthering my view on future gas prices. For this reason, crude futures will hit below $30/barrel creating more unemployment and negative effects in other sectors. The only positive note of this further decline will be gas prices below the lowest level of $1.70, which we saw a couple weeks back.

Increased oil production and supplies in other parts of the world, along with U.S. Shale Fracking Boom, have created cheaper crude prices. There is too much world global inventory currently pushing storage facilities to scramble. Supply reports released are not showing any reduction. Economic development no longer spurs oil demand growth as it once did prior to the fracking boom. Overseas in China, the top oil demander in recent years, has entered a less oil-intensive stage of development, while years of high prices have led to innovative technology and economic growth. A return to previous price crude price highs may not be a close prospect, as it has become vibrant that we have begun a new chapter in oil market history.

In fact, the Energy Information Administration forecasted inventory figures have all come in short of the forecasts. The EIA is the federal agency in charge of releasing crude inventories and does so every week, four days after the previous week’s end. The report details the change in the number of barrels of crude oil held in inventory by commercial firms during the past week. A forecasted figure is released to the public as to what they feel crude inventories will be before the actual figure is released. Whether the reported figure is above or below the forecasted supply figure can make crude future prices go up or down by a great deal. There have not been many crude inventory figure reports that have been overstated because supply is growing and has been growing at an accelerating rate since 2008.

The EIA’s crude inventory report influences the price of petroleum products which affects inflation, but also impacts growth as many industries rely on oil to produce goods. Many products you use at home and at school were derived from refined products created in refineries. The refineries broke down chemicals and hydrocarbons into simpler chemicals to be used by other companies in household products. The refineries also use crude as an energy source to create refined products you see in products at home and school. For example, many products that have wrapping and labels were once a more condensed and complicated substance before being broken down (refined) at a refinery. As for the gasoline, it is a refined product from crude. It is a multistep process for a refinery to break down a thick crude product into a lighter flammable gasoline product you fill up in your car. The EIA’s crude inventory reports greatly affect the current market price you pay at the pump. Recently gas prices rebounded up to over $2.00 in Walker County because crude futures went from the low $40’s to low $50’s. I on the other hand believe the recent jump to over $50/barrel is short lasted.

Many industries in the Houston area are impacted on the price of crude. Houston area saw a great job growth and innovation period from 2008 to 2014. Fracking and horizontal drilling supplied a great number of jobs and people moved to the area, fueling the housing and retail sectors. I moved to the Houston area to work in contracting work at refineries before enrolling at Sam Houston State University.  If it were not for the shale crude booms in the United States I wouldn’t be writing this article for The Houstonian because I would still be in Southern California. These industries are going to get hit hard when crude falls below $30/barrel because their revenue depends on the energy sector. Many employees that live in the gulf region work for energy companies or companies that get their revenue from the energy industry. When industries rely too heavily on market conditions and do not adapt they get hit hard and incur a lot of debt. It will result in many company bankruptcy cases along with employee layoffs, which we are currently seeing in many drilling and mid-sized energy companies at a small scale.

So what will the Energy and Drilling industry in America do at the plate? They currently are down three runs in the bottom of the ninth inning with bases loaded. What is going to happen is we are going to strike out and lose the game. There is too much crude supply in the world and limited storage capacity is driving prices down.  The rig slashing count news you see on television or in the newspaper isn’t telling you that those rigs produce the bottom ten percent of production. When the rigs that produce the top 10 percent of production are shut down then that will be news breaking. But, they cannot. They have bills and expenses to pay off and can only do so by drilling more in effect driving the prices down further. Secondly, China and Europe are not demanding as much oil as they once did. Europe is going through a tumultuous economic period with slowing economic growth strengthening the US Dollar which makes it more expensive to purchase. They announced recently that they have to infuse over $1 trillion into the European Union to get them back on their feet.  Lastly, OPEC producers aren’t slowing down any time soon. For these main reasons, Crude prices will go to $30/barrel and gas prices will be below the last low level of $1.70 a gallon in the near future.

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