A Light at the End of the Tunnel for Crude Oil Prices

By Markets Fool.com

Crude oil prices have collapsed over the last six months, leading to $2 gasoline in some parts of the country. The impact has been widespread, with energy stocks collapsing, oil drilling falling sharply, and energy companies already announcing thousands of layoffs because of low prices.

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But the reprieve from low oil prices could be short lived if suppliers of oil slow their production growth. The International Energy Agency, or IEA, gave some hints this week that supply may come more in line with demand in 2015, and on Friday, crude oil prices shot up around 2% as a result.

What the IEA sees in 2015
In its latest market outlook, the IEAsaid that oil production growth in 2015 will be 350,000 barrels per day lower than previously expected, to 950,000 barrels per day. So, supply will still grow significantly in 2015, just not as much as previously thought. The supply cuts are expected to come from non-OPEC countries like Canada, the U.S., Colombia, and Russia.

The decline in production in each region is due to falling prices, which are already hurting oil drilling. U.S. oil rigs in operation have already dropped nearly 10% in the past month and a half, a trend that will likely continue if oil prices stay below $50 per barrel.

US Rotary Rigs Chart

US Rotary Rigs data by YCharts.

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Slower growth in supply could ease some of the pressure on oil prices, but keep in mind that oil production will still grow in 2015. Wells that have already been drilled won't be capped, and OPEC is committed to keeping its 30 million barrel per day production target intact. But even slower growth could be good for oil prices long term.

2015 will see a rapid slowdown of U.S. oil drilling. Source: LINN Energy.

The demand side of the equation
The next question for the market to answer is how much will oil demand grow in 2015?

The IEA has predicted that demand will grow by 0.9 million barrelsper day, and if it does, the supply-and-demand imbalance will ease slightly. But economic conditions are starting to call that prediction into question.

This week, the United Nations increased its growth expectationsfor the Asia Pacific region to 5.8%, higher than 2014's 5.6% growth, because of slower inflation and low oil prices. U.S. growth has also been spurred on by lower oil prices, reaching 5% in the third quarter of 2014.

With oil markets oversupplied by between 1 million and 2 million barrels per day, the gap needs to be cut by both lowering supply and increasing demand. For now, it appears both sides of the equation are going to improve as 2015 unfolds.

Short-term pressure still very real in oil markets
While oversupply in oil markets may ease in 2015, don't expect prices to skyrocket to $100 per barrel overnight. Even if supply growth slows and demand growth picks up, it's still likely the oil market will be oversupplied by the end of 2015. Even if oil companies cut back on drilling, they won't shut off production at completed wells, so the adjustment of supply and demand has a very long lead time.

For oil explorers and producers, this week's IEA report was just a small sliver of hope that they'll see oil prices return to levels that make wells economical over the long term. But it'll be a long waiting game and I, for one, think the U.S. shale industry will take a brunt of the oil price pressure. The U.S. oil boom was good while it lasted, but 2015 brings the reality of low oil prices and falling profits for oil producers, something the energy industry is going to have to get used to.

The article A Light at the End of the Tunnel for Crude Oil Prices originally appeared on Fool.com.

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