A year ago, benchmark oil prices plunged from a high of $75 a barrel in early October to a late December low point of $42 and change. By contrast, Q4 2019 was relatively calm. The North American benchmark hugged the mid-50s before closing out the year in the low 60s.

Despite that relative steadiness, few Wall Street analysts expect favorable earnings comparisons for energy companies with year ago results. One reason is a flood of new associated natural gas supplies hitting the market in 2019, which resulted in Q4 benchmark prices falling to less than half where they traded in the year ago quarter.

But the larger worry weighing on the sector is the pronounced reduction in the national rig count that started in the second half of the year. We’ve commented early and often about North American shale producers’ ongoing conversion to the gospel of generating free cash flow, reversing their long-time practice of maximizing output at any cost.

One of the best things about commodity markets – and any sort of “real” asset – is that ultimately prices are based on supply and demand.

If the price of oil is “too high,” there’s a market response – rising production and falling demand – that pushes prices back into line over time.

Of course, oil prices can rise or fall in the short-run due to speculative flows in futures markets; in fact, that’s something we watch closely in Energy & Income Advisor over time.

However, ultimately, the price of oil doesn’t rise because people are excited about buying oil — crude rallies when demand for the commodity rises faster than supply.

It really is that simple.

Inflection points in the supply demand equation for oil are rare. In the period from 1998 through 2002, for example, rising demand for crude from emerging markets including China and India shifted the oil market from a period of glut to an era of scarcity. Ultimately that sent crude from lows in the teens in the late 90’s to highs around $150/bbl in 2008.

We believe we’ll look back on 2019 as the year we reached another major inflection point for oil. Specifically, the Saudi -led pump-at-will strategy initiated five years ago has finally had the desired effect – the recent era of persistent glut and shale oversupply is giving way to a new period of tightening supply and demand conditions.

As we approach the end of 2019, it’s time for a detailed assessment and audit of our outlook for energy prices, stocks and our portfolio recommendations.