Tags: oil | price | cycle | year

History Says Oil Will Take Years to Recover

By    |   Friday, 16 Jan 2015 08:25 AM

We are experiencing the fifth crash in oil prices since futures on the commodity began trading in 1983. Oil prices have fallen about 60 percent during the past eight months. On average, it took prices about four years to recover from previous crashes of this size.

Many in the oil industry understand that prices follow a boom and bust cycle. This is the nature of almost every business. High prices attract competition and new entrants increase supply until supply exceeds demand and prices fall. Low prices then force high-cost operators out of business, which reduces supply and eventually demand exceeds supply and prices rise.

In oil, this cycle has historically taken years to unfold. Oil production is capital intensive and new projects take years to come on line. Once a well is pumping oil, many operators will continue to produce oil, even at a loss, to maintain cash flow that allows them to meet at least some of their expenses.

We are in the early stages of the down move of this price cycle and a number of producers are still pumping oil to maintain cash flow. When the number of producing wells drops significantly, a process that could take a year or longer, we should see signs of a bottom.

Oil futures traders tend to focus on the short term to benefit from booms and busts in oil. Stock market traders should consider adopting a similar perspective.

Exxon Mobil is a company that has survived a number of up and down cycles in the oil industry. Since 1983, it has taken two to four years for the stock's price to recover to its old highs after an oil price collapse.

From the past, we know that there is no reason to rush into oil stocks. Investors should wait for signs that a bottom is truly in place before buying companies in this sector.

© 2017 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
MichaelCarr
We are experiencing the fifth crash in oil prices since futures on the commodity began trading in 1983. Oil prices have fallen about 60 percent during the past eight months. On average, it took prices about four years to recover from previous crashes of this size.
oil, price, cycle, year
314
2015-25-16
Friday, 16 Jan 2015 08:25 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved