Why Oil Could Fall To $23 Per Barrel

The price of U.S. crude oil closed up 33 cents per barrel last week, providing temporary relief to oil investors who had endured seven consecutive weeks of falling prices.

During that stretch, the price of crude oil has fallen about 30 percent, and many are predicting that the fall is not yet over.

Cause For The Pause

The reason that crude oil took a break from its nosedive is likely a pair of encouraging reports that were released last week.

One report by the International Energy Agency (IEA) provided the first indication that low oil prices have begun to curtail oil production in certain areas of the globe, including North America.

The second report, not directly related to oil, came from the University of Michigan. This report indicated that consumer sentiment is at its highest level in over ten years and that the improving job market and falling gas prices are two major reasons.

Related Link: The Downside Of Low Oil Could Be A Wave Of Defaults

Consumer sentiment is a major economic driver, and an improving economy likely means an increase in oil demand. Massive oil oversupply is the main force behind the recent collapse in oil prices.

Could Crude Hit $23?

Every oil investor is asking themselves the same question: With crude prices now comfortably below $50 per barrel, how much lower can oil go?

According to Joel Moser, CEO of Aquamarine Investment Partners, the key number that will determine the bottom in oil prices is the incremental cost of oil production in North American shale regions such as North Dakota.

An industry insider recently told Moser this number is around $23 for an average Bakken well, a chilling price for oil investors.

How To Play An Oil Recovery

Oil ETFs such as the United States Oil Fund, LP USO and the United States 12 Month Oil Fund, LP USL, as well as general energy ETFs such as Energy Select Sector SPDR Fund XLE are popular ways to bet on a recovery in oil prices.

The future is uncertain, but that group of tickers is worth watching.

Image credit: Mark Rain, Flickr