Oil Is Back Under $50. Will We See $40 Next?

Producers like Suncor Energy Inc. (TSX:SU)(NYSE:SU), Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ), and Canadian Oil Sands Ltd. (TSX:COS) are seeing their profits getting squeezed by low oil prices. What’s next for them?

| More on:
The Motley Fool

When the West Texas Intermediate (WTI) oil price reached US$60 in June, investors wondered if it was the start of a long oil recovery. Those questions now seemingly have been answered.

On Monday the WTI price sunk back below US$50 per barrel, which is not good news for Canadian producers like Suncor Energy Inc. (TSX:SU)(NYSE:SU), Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ), and Canadian Oil Sands Ltd. (TSX:COS). Where will the oil price go from here?

Unfortunately, we can’t answer this question with certainty, and no one else can either. But we’ll take a look at some of the reasons why oil has sunk this far, and ask if US$40 is a possibility.

Why oil has sunk back down

In recent weeks there have been a number of factors pushing down the price of oil. The turmoil in Greece is a negative for oil demand, and a positive for the U.S. dollar. The nuclear deal with Iran could add another one million barrels per day of supply in a year. But the most important factor has been the resilience of American shale oil producers.

To put this into proper perspective, let’s take a look at the prevailing wisdom in late 2014. At that time, oil prices were falling off a cliff. Producers responded by cutting their drilling plans, and the rig count fell.

Most analysts agreed that reduced drilling wouldn’t have an immediate effect, but would affect production in the second half of 2015. A Reuters poll on December 22nd predicted that U.S. crude would trade at an average price of US$68.70. According to ANC analyst Natalie Rampono, “In terms of the floor price, we think $60 per barrel will be the level at which fast-rising U.S. shale oil producers will feel the pinch.” Her beliefs were widely shared.

But to the oil producers’ credit, they have responded decisively to low oil prices. They have cut costs and focused on only their most prolific plays. And they’ve managed to keep production numbers relatively steady, which few people predicted back in December.

Where does oil go from here?

For gold prices to rebound back to US$60, you’ll need to see some serious disruptions to U.S. supply. This could come in the form of bankruptcies, or canceled projects, or major declines in individual companies’ production numbers. Such a thing is feasible, but not likely to happen any time soon.

It’s much more likely that we’ll see US$40 oil. Prices have already neared that level once this year before rebounding sharply. And the supply/demand picture hasn’t really changed since then. So, if oil prices sink back into the low US$40s, there’s very little stopping a further decline.

Thus, if you hold Suncor or CNRL, or especially Canadian Oil Sands, now may be the time to sell your shares before it’s too late.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »