Have oil prices hit bottom? While I don’t know the answer, I have a hunch that we might have bottomed or might be close to bottoming. In a Financial Times article “Opec chief says oil prices could soon rebound” (subscription might be required) on January 26, 2015, Abdalla El-Badri indicated that prices might have bottomed.
Oil prices may have hit a floor and could soon rebound, said the secretary-general of Opec, the oil producing cartel, on Monday.
After hovering in the $45-$50 a barrel range, Abdalla El-Badri said, “maybe prices have reached a bottom”.
Speaking on the sidelines of a Chatham House conference in London, Mr El-Badri said to the Financial Times: “How long will it last? I don’t know … but I am sure the price will rebound.”
In a New York Times article “Oil Prices Surge 8% After Long Slide Down” (subscription might be required), there were a few factors contributing to a sudden rise in prices this past Friday. The decreased rig count, however, seems to suggest that oil production will decrease and that a bottom should not be too far away.
The rally came shortly after the Baker Hughes service company reported that the nation’s rig count had dropped by 94, or 7 percent, in the last week, the largest single-week drop since the late 1980s. That leaves 1,223 rigs in operation, the lowest number in three years, and energy executives say another 300 rigs could be decommissioned in the next few months as service contracts expire.
A drop in oil production normally happens several months after rigs are decommissioned, but the Baker Hughes report was another sign that oil companies were responding fast to the global oil glut by cutting their spending.
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“My gut says the oil price has been artificially low, and I think this is a logical correction from that overreaction,” said Joel Moser, the chief executive at Aquamarine Investment Partners. “It would not surprise me at all that this may reflect a bottom.”
While I am not positive that oil prices have bottomed, I think we are at least close. Perhaps oil prices touch the high $30s. But I doubt that oil prices could stay in the $30s for an extended period of more than two months. I believe the pain being endured by the oil industry is intense, as evidenced by the dropping rig count. Thus, I expect that oil prices have either bottomed or will soon bottom.