Many of you know that oil is off the highs of last week when it hit $51. This week it slumped and hit $46. I don’t think it can go much lower for three reasons:
- Iran has seen as much of production increase as it can expect. The Iranians immediately pumped up production after the sanctions were lifted, but they have plateaued. Iran does not have the infrastructure to increase production from its current levels without significant investments. The country is looking for $100 billion in investment from outside companies in order to update its current infrastructure. I do not see that happening.
- Nigeria continues to have problems. Rebels are reporting today that they have blown up another pipeline and are now threatening to blow up tankers. This rebel insurrection is only half the problem for Nigerian government. There widespread corruption in the oil industry and military forces which will make it difficult for the Nigerian oil company to return to normal production levels.
- I watch Venezuela waiting for the civil war. Its oil industry and economy is so bad that it looks like it may start to default on its loans from other countries. Do not look for Venezuela’s problems to be resolved anytime soon.
If you combine these three reasons with the fact that the U.S. is still lowering its oil output and drawing down its oil storage, you can see that prices will probably not go much lower.
NatGas has seen a 33% price increase over the last few weeks. Many believe this increase is driven by extremely hot weather in the western part of the U.S. and the belief that the remainder of the country will experience sweltering temperature this summer. This scenario has caused many speculators to jump into NatGas.
Along with the scenario of increased demand, there is also a decrease in production. Natural gas production in the Lower 48 States from June to July is projected to fall 1%, the Energy Information Administration projects in its monthly Drilling Productivity Report (DPR).
The combination of usually hot temperatures and continued decline in production leads to believe that NatGas will not decline much below $2.50.