Linn Granite Wash Drilling

Image source: LINN Energy.

A little over a year ago, it seemed certain that we would have $100 oil for years to come. But the oil market has collapsed since then and WTI crude oil prices have fallen to as low as $41.35 per barrel.  

What's interesting is that we're not close to a turnaround in oil prices considering the current market conditions. Given OPEC's dynamics, Iran's nuclear deal, and uncertainty in China, I think we'll see low oil prices for at least another year.

OPEC's stare-down with shale drillers
The popular narrative in late 2014 and early 2015 was that OPEC was trying to squeeze U.S. shale producers by keeping their production high. That was probably overstated, since OPEC just maintained its production target -- it didn't give in to low prices and lower production, as it had in the past.

But Saudi Arabia has actually been increasing production in 2015 and seems to be testing how U.S. shale producers will react to low oil prices. And the news hasn't been good. U.S. oil production has been increasing this year, and after a huge decline in rig activity to start the year, explorers appear to be putting rigs back to work in places where they can generate a return.

US Crude Oil Production Chart

U.S. crude oil production data by YCharts.

It'll take a lot longer than a few months for shale producers to cut production significantly, so don't expect U.S. production to fall much, if at all, in the second half of 2015. But OPEC and Saudi Arabia appear to be content to let the stare-down continue, and that could mean low oil prices for a lot longer.

Iran is a wild card
It's no coincidence that the Obama administration's nuclear agreement with Iran has coincided with a sharp decline in oil prices. The U.S. Energy Information Administration estimates that the Iran deal could bring 600,000 barrels of oil per day back into the market in 2016, adding supply to an already oversupplied market.  

Iran Oil Production

Source: U.S. Energy Information Administration.

If the nuclear deal goes through, it just adds another level of pressure to oil prices in general. OPEC, of which Iran is a part, could ease the supply glut, but the situation with shale drillers doesn't look like it's ending soon, and Iran could make the problem worse.

China could be key to future oil prices
The wild card in all of this is China, which has been the driver of global oil demand growth over the last decade. With oil demand in the U.S. and Europe in steady decline, China has accounted for about half of the global growth in demand. But that could be coming to an end.

Sinopec, China's largest oil refiner, is predicting that China's diesel demand will peak in 2017. If that prediction comes true, it's possible that peak global demand would follow shortly thereafter, which would continue the downward price pressure.  

Oil prices won't be coming back anytime soon
The macro environment looks to be pointing to low oil prices for at least the next year or two. That could change if low prices begin to pressure supply, but right now, the oil market looks like it'll be in a state of oversupply well into 2016, especially if Iran enters the market at full steam.  

Depending on how you look at it, that could be good or bad for your investments. If you own energy stocks, the pressure they've been feeling isn't going to subside soon, but consumers and auto companies should love lower prices.

Just keep in mind that oil markets can behave erratically at a moment's notice. What looks obvious today could change tomorrow, so stay on your toes and keep an eye on how these macro trends continue to play out.

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