Three Reasons Oil Prices Will Fall

NEW YORK (TheStreet) -- The oil market has heated up the during the past several months as the price of oil remained above the $100 mark. It should cool down. Here are three reasons the price of oil should drop to the mid $90s.

1. OPEC oil production could start to rise

According to the recent Organization of Petroleum Exporting Countries' monthly report, OPEC oil production during March dropped by 626 thousands of barrels a day mainly because of lower production in Libya, Angola, Iraq and Saudi Arabia. Moreover, Libya has yet to reach its full oil production capacity, which stood on 1.6 million bbl/day back in 2010. The country's oil production is now only 243,000 of bbl/day. But analysts expect Libya's oil exports will pick up in the coming weeks.

In total, OPEC's daily production was 29.6 million, which was slightly lower than its 30 million bbl/day quota. Conversely, the oil production of non-OPEC countries more than offset the lower production volume in the past month, according to the latest monthly update by the International Energy Agency.

Based on the above, the expected rise in Libya's oil production and steady growth in non-OPEC oil production is likely to pressure the price of oil.

2. Natural gas market slowly cools down

Due to the harsh winter conditions, the demand for natural gas strengthened. As a result, the price of natural gas reached high levels during the winter, up 35% during the first quarter from a year earlier. Because one of the purposes of oil is for heating, the rise in demand for natural gas also increases the demand for its alternative energy source -- crude oil.

The chart below shows the ratio between the price of oil and the price of natural gas during 2013-2014.

Source: Energy Information Administration

As you can see, the ratio between oil and natural gas tumbled down during February to around 16-17; this low level demonstrates how high the price of natural gas reached. During the summer this ratio tends to rise as the price of natural gas falls. In such a case, the natural gas market is likely to loosen, which will also reduce the pressure on the oil market.

The elevated prices of natural gas and oil benefited oil and gas producers such as Exxon Mobil (XOM) and Chesapeake Energy (CHK) during the first quarter. The companies are likely to improve their profit margin, because the price of oil was 4.4% higher year over year and the price of natural gas was more than 35% higher than the price in the first quarter of 2013.

The harsh winter conditions reduced the oil production during January 2014, according to the U.S Energy Information Administration estimates. But since early February, oil production has picked up, and as the weather gets clearer, the oil production is likely to further rise.

3. High imports and production

According to the latest EIA weekly update, since March oil supply has improved by 2.6% mainly due to the 4% gain in oil imports and 1.4% increase in oil production. As a result, the total supply (comprising of imports and production) has reached 15.736 million barrels per day. Thus, the gap between the supply and demand for oil (refinery inputs) has widened in recent weeks, as indicated in the chart below.

Source: Energy Information Administration

These recent developments suggest the U.S oil market has loosened in the past several weeks. If this trend persists, it could further drag down the price of oil to reach the mid $90's.

Conclusion

The oil market is likely to further loosen in the coming weeks on account of stronger local production, reduced pressure from the natural gas market and potential rise in global production mainly from OPEC, which could pressure down global oil prices. Therefore, oil prices are also likely to slowly come down to the mid-$90s.

For further reading seeHow Will the Brent-WTI Spread Impact Oil Refiners?

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At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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