Oil prices have been all over the map in the past year. Crude rallied 30% during the first nine months of 2018 before falling off a cliff and plummeting 40% over the final three months, finishing the year down 20%. Oil has since started staging a comeback and was recently up double digits from the bottom.

Crude could continue to be volatile in the coming months as the market self-corrects. However, in the view of oil reservoir specialist Core Labs (NYSE:CLB), the oil market appears poised to bounce back during the second half of 2019. CEO David Demshur offered three reasons on his company's fourth-quarter conference call he believes that will be the case.  

Check out all our earnings call transcripts.

An oil industry worker with a laptop next to an oil pump.

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Supply and demand are going in opposite directions

Changes in supply and demand play a major role in determining the direction of oil prices. For much of 2018, demand was rising while supplies were falling, mainly because of OPEC's efforts to curb its output. However, that trend reversed during the fourth quarter, as an OPEC-led coalition increased its production ahead of a new round of sanctions on Iran from the Trump administration.

Demshur, however, noted on the call:

Increases in global demand, increases in net decline curves, coupled with steeply falling production in Mexico, Venezuela, Colombia, Angola, Libya, Iran, and China will continue to tighten the global crude market. The acute fourth-quarter global crude oil inventory build, owing to expanded production from the Middle East and Russia and the issuance of Iranian export waivers for six months, should self-correct in the first half of 2019. Remember the decline curve still always wins and never sleeps.

First of all, the Core Labs CEO pointed out that oil demand continues to increase. After rising by 1.3 million barrels per day (BPD) last year, the International Energy Agency sees oil demand expanding by another 1.4 million BPD in 2019 as the fading impact from higher oil prices from 2018 will help offset slower economic growth. That increased consumption will help eat into the inventory glut.

At the same time demand continues its upward climb, production from legacy fields is falling. Demshur noted that the output from several countries is declining rapidly, which will tighten the delicate balance between supply and demand, especially when factoring in OPEC's decision to reverse course and reduce its output through at least the first half of 2019. Those two rival forces should bring the oil market back into balance in the coming months. As that happens, oil prices should stabilize and could move higher, which would probably give oil companies incentive to drill more wells, boosting activity levels for service companies like Core Labs.

An offshore jackup rig at dusk.

Image source: Getty Images.

A large supply of low-cost oil projects is working its way through the pipeline

The third reason Core Labs is optimistic about the second half of this year is that oil companies are moving forward with an increasing number of major projects that should benefit the oilfield service sector as they start progressing. Demshur noted that his company had seen an uptick in major project announcements, indicating that after only making a final investment decision (FID) on 20 major projects in 2017, the industry sanctioned 30 last year and had "30 more queued up for 2019."

That rise in activity levels is important to Core because it typically has a direct impact on the financial results of its reservoir description business. While there is a lag between announcement and effect, as Demshur noted that "Core's revenue opportunity usually occurs four to five quarters after the FID is sanctioned as rigs need to be mobilized, wells drilled and the core and fluid samples taken from the reservoir zone," the uptick in project announcements "should start to bolster Reservoir Description revenue in 2019."

A bounce back looks promising

Core Labs' CEO sees the continued rise of demand and an anticipated decline in supplies combining to drive an improvement in oil prices in the coming months, which should fuel higher levels of drilling activities. Add those two factors to the recent uptick in major project approvals, and Core believes that the oil field service market should be much better in the second half of this year. That improving market should help bolster the profitability of service companies like Core, which has been under pressure in recent months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. 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.