OPEC Chief: Balance Is Being Restored to the Force

By Markets Fool.com

Since the middle of last year the forces that keep the oil market in balance have shifted toward an overabundance of supply causing a deep and unexpected plunge in the price of crude. Those forces, however, are beginning to return to balance as high-cost U.S. shale producers rapidly cut investments while demand starts to pick up. This, according to OPEC Secretary-General Abdalla El-Badri, will enable the oil market to return to balance by the second half of this year.

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Rapid response
At a conference over the weekend in Bahrain the Secretary-General noted that U.S. oil companies are rapidly laying down oil drilling rigs and delaying the completions of new wells in response to the deep drop in the oil price. Just last week another 75 rigs were pulled out of service marking 13 straight weeks where U.S. drillers cut the rig count. So far the U.S. rig count is down 43% since October.

The rig count is vitally important to growing U.S. oil production because of how quickly the production from previously drilled oil wells trails off. As the following chart from the U.S. Energy Information Administration notes, oil production in the Eagle Ford Shale is projected to barely grow this month.

Source: EIA.

With the rig count in the play now falling below 250 rigs, after another eight rigs were shut down last week, the industry barely has enough rigs running just to keep production flat. That's because while those rigs are adding 150,000 barrels per day of new production that's barely offsetting the 138,000 barrel a day in production that legacy wells are no longer producing resulting in a net gain of just 17,000 barrels per day. Soon these meager production gains could slip into declines as not enough rigs will be running to maintain production, which OPEC sees as being a key to erasing the oversupply of oil.

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The cure for low oil prices is low oil prices
While the expected decline in production will play the largest role in bringing the oil market back into balance OPEC's Secretary-General sees demand helping to bridge the gap as well. He noted that oil consumption is now expected to increase by 1.2 million barrels in 2015. That's about 200,000 barrels per day faster than demand rose last year. This is due to cheaper crude oil helping to ignite increased demand for oil in big energy importers like China and India.

Meanwhile, cheap oil in the U.S. has led to cheaper gasoline for U.S. motorists. That's not only saving drivers a bundle at the pump, but it's also encouraging drivers to use more gas. In fact, according to the EIA gasoline demand is expected to increase by 60,000 barrels a day this year to 9 million barrels a day, which would lead to the highest demand for gas in this country since 2009. That's a pretty remarkable shift in demand as the EIA has been projecting demand to fall to 8.86 million barrels a day.

Investor takeaway
While there are still some short-term clouds on the horizon, such as a glut of oil in storage, the oil market should come back into balance later this year. While that doesn't necessarily mean the oil price will skyrocket back to triple digits, it does suggest that the oil price could increase later this year. That could send oil stocks higher as many were beaten down when oil plunged and could spring back to life once it starts to rebound.

The article OPEC Chief: Balance Is Being Restored to the Force originally appeared on Fool.com.

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