An excerpt from the latest Howard Marks gem (The Lessons of Oil):

"Further, it's hard for most people to understand the self-correcting aspects of economic events.

  • A decline in the price of gasoline induces people to drive more, increasing the demand for oil.
  • A decline in the price of oil negatively impacts the economics of drilling, reducing additions to supply.
  • A decline in the price of oil causes producers to cut production and leave oil in the ground to be sold later at higher prices.

In all these ways, lower prices either increase the demand for oil or reduce the supply, causing the price of oil to rise (all else being equal). In other words, lower oil prices - in and of themselves - eventually make for higher oil prices."

Marks is of course correct in his observations, however, in a market as 'sticky' as oil it can take months for there to be a significant shift in supply & demand. According to Bank of America/Merrill Lynch there won't be a recovery in oil prices until the 2nd half of next year:

Oil_Supply_Demand

Equity markets are forward looking (usually 6-9 months ahead) and this week's powerfully bullish high volume candlestick in the XLE (SPDR Energy ETF) may be an indication that the worst is over for oil related equities and shrewd investors are already looking forward to a stabilization and eventual rebound in oil prices:

XLE_12.19.2014