3 Reasons for the US Crude Oil Weakness

09/24/2015 9:00 am EST

Focus: ENERGY

Michael Berger

President & Founder, Technical420.com

Since many investors are searching for reasons that explain the low US oil price environment, Michael Berger, of Technical420.com, shares three global reasons he has found for the weakness and why he still recommends incorporating MLPs into a well diversified portfolio.

Even though the price of crude oil has come off of its lows, some analysts expect to see further weakness. Goldman Sachs Group, Inc. (GS) recently said the global oil surplus could drive prices as low as $20 a barrel.

The weak price environment has put oil and gas production projects—valued at over $1 trillion—at risk because they are uneconomic at current prices. During 2015, oil and gas companies have reduced their total investments in the United States and analysts expect to see them cut investments by more than $220 billion next year.
 
Three Reasons for Weakness

Many investors, financial advisors, and analysts are searching for reasons that explain the low price environment and we have been able to determine three reasons for it:

  1. During the second quarter of 2015, Saudi Arabia increased its oil production by more than 100% on a quarter-over-quarter basis. Oil production is at record levels and they are producing more than 10 million barrels a day.
  2. Iranian exports are moving closer to recovery and they are preparing to increase the amount of oil they export. If the political conditions remain favorable in Iran, then the foreign investment will increase and production will continue to rise over the long-term.
  3. During the last two months, Iraqi oil production surged to record levels and they have been producing more than 800 thousand barrels per day.

This news, coupled with the recent announcement from the International Energy Agency (IEA) has investors sitting at the edge of their seats. In mid-September, the IEA said they expect United States shale production to decrease by 400,000 barrels a day. This announcement came less than two months after the IEA said they expect to see United States production increase by 60,000 barrels a day.

While commodity price volatility should continue to act as a headwind, we recommend incorporating well positioned Master Limited Partnerships (MLPs) into any well diversified portfolio. Investors should target companies that have stable cash flow, visible growth backlog, and enough liquidity to capitalize on growth initiatives.

Michael Berger, Founder and President, Technical420.com

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