Here Are Three Factors That Could Drag Down Oil Prices Even More

NEW YORK (TheStreet) -- In the past three weeks the price of West Texas Intermediate crude oil has lost 6% of its value; a barrel is currently priced at around $100.

The recent plunge in oil prices has also dragged down the shares of big oil producers such as BP (BP) and Chevron (CVX).

BP's stock is at $51.84, down 1.7% since the beginning of the month. Shares of Chevron are at $129.35, down 0.9% during July. But will crude oil prices continue to decline in the coming weeks? Following are are three factors that could keep pressure on oil pressures.

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1. OPEC's Oil Supply Remains Stable

OPEC's latest monthly update showed little change in the total output of OPEC member countries. As of June, OPEC's production reached 29.7 million barrels a day, nearly unchanged from previous months. Iraq's oil output fell by only 5%, month over month. This fall in production was offset by modest gains in production in Nigeria and Saudi Arabia. The International Energy Agency also reported little change in OPEC's oil output.

2. U.S Stockpiles Keep Rising

U.S oil stockpiles are also picking up, mainly because of higher production. The chart below shows the U.S oil stockpiles and average weekly price of oil during 2012-2014.

Courtesy of Energy Information Administration

As you can see, the oil storage has increased in the past several weeks, after reaching its lowest level in years back in March 2014. Moreover, the U.S. Energy Information Adminstration estimates that 2014 U.S oil production will rise by 15% year over year. As the stockpiles keep picking up with the rise of production, oil prices are likely to slowly come down.

3. Demand Isn't Growing Faster

Despite the progress in the U.S economy, the EIA estimates that the U.S oil consumption will fall this year compared to 2013. Further, the IEA also projects the global oil consumption will rise at a slower pace than previously estimated, due to "weaker-than-expected midyear economic data." The slower-than-projected rise in global consumption and potential modest decline in U.S oil demand are also likely to bring down the price of oil.

Bottom Line

The recent decline of oil prices could continue as long as OPEC's output doesn't fall due to tensions in the Middle East, mainly in Iraq. In the coming months we could see oil prices falling by a few more dollars to a range close to the mid-90's.

For further reading: Is Chesapeake Energy's NGL Strategy Right?

At the time of publication, the author held no positions in any of the stocks mentioned.

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


Now let's look at TheStreet Ratings' take on some of these stocks:

TheStreet Ratings team rates BP PLC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate BP PLC (BP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, good cash flow from operations, solid stock price performance and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has significantly increased by 107.48% to $8,231.00 million when compared to the same quarter last year. In addition, BP PLC has also vastly surpassed the industry average cash flow growth rate of 17.51%.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The current debt-to-equity ratio, 0.41, is low and is below the industry average, implying that there has been successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.93 is somewhat weak and could be cause for future problems.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 3.2%. Since the same quarter one year prior, revenues slightly dropped by 2.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

TheStreet Ratings team rates CHEVRON CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CHEVRON CORP (CVX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, good cash flow from operations and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CVX's debt-to-equity ratio is very low at 0.15 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.02, which illustrates the ability to avoid short-term cash problems.
  • Net operating cash flow has increased to $8,417.00 million or 47.30% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 17.51%.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • CVX, with its decline in revenue, slightly underperformed the industry average of 3.2%. Since the same quarter one year prior, revenues slightly dropped by 6.2%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

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