Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: There seems to be no end in sight to oil's downfall, as the price of West Texas Intermediate crude fell 3.1% by midafternoon Friday to $58.08 per barrel and Brent crude fell 2.6% to $62.04 per barrel. In June, WTI crude peaked at $107.95 per barrel and Brent crude was at $115.19
So what: Friday's drop was driven by a demand revision from the International Energy Agency, or IEA. The agency now predicts oil demand will grow by 900,000 barrels per day next year to 93.3 million barrels -- 230,000 barrels per day lower than its previous forecast.
To make matters worse, non-OPEC supply is expected to grow by 1.3 million barrels despite low oil prices. The combination of tightening demand and growing supply means oversupply appears to be a reality in the market for at least the first half of 2015. That's devastating news for not only OPEC, which must choose whether to cut production to increase the price of oil, but also oil suppliers that were profiting from a domestic energy boom.
Now what: Global supply growth is being driven in no small part by drillers such as Continental Resources (NYSE:CLR) and Whiting Petroleum (NYSE:WLL), which are developing shale plays around the U.S. They have been exploiting shale plays that became highly profitable when oil was over $100 per barrel. Now that narrative is changing and these companies may be below breakeven for new wells.
But even if these companies slow drilling in 2015, the U.S. will see an increase in supply from wells that have already been drilled, exacerbating an already-oversupplied oil market. It's a downward spiral that seems to worsen every day.
The bad news for companies such as Continental Resources and Whiting Petroleum is that we may be in for a very protracted downturn in the price of oil. That will crush profits in 2015 and beyond and potentially mean they won't be able to drill new wells profitably if prices continue to fall. We still might not have seen the bottom in their stock prices.