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Look at U.S. Production to See Where Oil Prices Could Be Headed

Oil prices could be setting up to collapse. If this happens, it could have severe consequences. Those who own oil stocks and related investments would be just one of the victims. Tread lightly.

You see, for the longest time, the Middle East was regarded as the “place to look out for” when trying to forecast oil prices.

Why? Because the region produced a lot of oil.

Certainly, to this day, the Middle East (Saudi Arabia, Iran, Iraq, and others) produces a lot of oil. But there’s another oil producer emerging that investors could be overlooking; it’s the U.S. This could really impact oil prices.

Why is the U.S. critical for oil prices going forward?

Take Saudi Arabia, for example. The oil fields in the country are run by the government. So the government can dictate how much the country produces. If you follow the oil market closely, you would know that Saudi Arabia, when oil prices are down, tends to slow down production. This, in turn, causes oil prices to remain stable.

Over in the U.S., it’s the complete opposite situation. Oil companies are independent and they heavily rely on oil prices. In times when oil prices are down, they produce less, and when prices are up, they flood the market with oil.

With the U.S., know one more thing; the magic oil price number is $60.00.

If oil prices remain above that level, you get an influx of supply from U.S. oil companies. We have seen oil prices above $60.00 for a while now.

With that said, the U.S. is flooding the market with oil.

Oil Production Soaring, Oil Exports Surging

The U.S. is producing more. In January 2017, the country’s oil produced amounted to 8.82 million barrels a day. In December, this figure was close to 10.0 million barrels a day. The U.S. is now producing the most oil it ever has since 1970s. (Source: “U.S. Field Production of Crude Oil,” U.S. Energy Information Administration, last accessed March 12, 2018.)

The U.S. is also becoming a bigger exporter of oil. It is now exporting more oil than ever before. In December 2017, the country exported 1.51 million barrels of crude oil to the global economy. In December 2016, it was just 468,000 barrels of crude oil. (Source: “U.S. Exports Of Crude Oil,” U.S. Energy Information Administration, last accessed March 12, 2018.)

Simple math here; this represents an increase of over 220% in just one year. Mind you, the U.S. oil production is expected to increase further. So it’s safe to assume that it will flood the oil market further.

Oil Prices Outlook: We Could Be Headed for an Oil Prices Crash

Dear reader, it’s very important to look at the U.S. oil production. Too many investors are disregarding it.

I believe that in the coming months and quarters, oil prices could be looking completely different than they are now. I will not be shocked if the oil price collapses 20% to 30% from where it is today—at around $61.00 a barrel.

Now the big question is, what happens if oil prices drop?

Oil companies will see their profitability cut immensely and their stock price could drop severely. This could wipe a lot of investors’ wealth.

But this isn’t all…

When times are tough (profits are declining), companies try to reduce their cost. One of the easiest ways to cut costs is to reduce the labor force.

The oil sector employs a lot of Americans. According to the American Petroleum Institute, the U.S. natural gas and oil industry supports 10.3 million jobs in all 50 states. So, all of a sudden, a collapse in oil prices could become an economic issue. (Source: “Fueling Growth And Opportunity,” American Petroleum Institute, last accessed March 12, 2018.)

I reiterate what I said earlier; tread lightly. The upside on oil prices could be very limited, but the downside could be massive.