Oil Prices: Get Ready for the Next Leg Down

By Markets Fool.com

After a steep drop late last year the price of oil has stabilized over the past month to right around $50 per barrel. However, that stability might not last long as there are signs on the horizon that the oil industry could be in for another leg down. That has some analysts suggesting that oil could hit $30 per barrel before rebounding later this year.

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Growing concerns
In the International Energy Agency's, or IEA, monthly report released this week it said it sees near-term trouble for oil prices. According to the Agency, its concern is that the U.S. might soon run out of spare storage capacity, which will put pressure on the price of oil this spring. The report noted that "on the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however." The report then went on to note, "[B]ehind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly."

Those aren't exactly encouraging words for oil executives or energy investors. It's leading to some dire short-term predictions for the oil price. For example, Goldman Sachs' president, Gary Cohn, said he thinks that crude could fall to as low as $30 per barrel this spring as storage capacity tightens up leaving fewer buyers of oil. It's also not helping matters that demand for oil in the U.S. is lower in the spring as refineries switch over from producing home heating oil to summer blend gasoline. This leads to less demand for oil each spring, which could exacerbate this year's oil glut with no other outlet for U.S. oil due to the export ban.

Longer-term gains
All that being said, there are also signs that once the U.S. gets past the spring glut it could see a sharp rally in the oil price later this year. That's because U.S. oil producers have dramatically cut spending to drill new wells, suggesting that production should plateau and could even begin to decline by year end.

We've already seen this in North Dakota, which is the country's second largest oil producing state. According to the state's Department of Mineral Resources, oil production in the state peaked at a record high of 1.23 million barrels a day in December. However, in January, production slipped 3.3% to 1.19 million barrels as producers only completed 47 new wells to start the year compared with 183 well completions the month before. That trend toward lower well completions is expected to continue throughout the year as most producers in the state have cut spending by 50% or more as a result of the oil price plunge.

Meanwhile, global oil demand is now rising a bit faster than projections after failing to meet demand projections last year. The IEA raised its demand forecast for the second half of this year by 75,000 barrels per day bringing total projected global oil demand up to 93.5 million barrels per day for the year. This is as lower oil prices have helped spur demand for oil. In fact, even Europe saw its declining demand for oil rebound, as it was up 3.2% last December and up again by 0.9% in January.

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This all suggests that the oil price could rally later this year as stronger than forecasted demand is met by a decline in supplies. Further, if OPEC does decide to trim its output at its June meeting it could hasten a rebound in the oil price.

Investor takeaway
The price of oil could be under a lot of pressure this spring as U.S. oil storage capacity fills up. However, the longer-term outlook is a bit more bullish as there are some signs that U.S. oil production is starting to slow its rapid growth with declining production in former growth darlings like North Dakota. That, combined with some recovery in demand could push oil prices meaningfully higher later this year. So, if you're thinking about buying oil stocks this spring could be the last great opportunity to buy near the bottom.

The article Oil Prices: Get Ready for the Next Leg Down originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.