In case you were on a submarine below the Arctic ice for the past 12 months, the decline in oil prices has been the financial news story of 2014 and continues to dominate headlines in 2015. Everyone is looking for a low, and the recent action has raised questions of whether or not we have found it. The combination of the fracking boom in the U.S., an unrestrained OPEC and slowing global economies has produced a world oil glut. The result? Oil prices dropping by 57% in just the last seven months to their lowest levels since the great recession. The story is primarily a supply one. Oil supplies in the U.S. hit a fresh record high last week at 413.06 million barrels. EIA crude stocks are 54.975 million barrels above year ago levels. Yet prices appear to have hit a consolidation level between$45-$50. It's hard to see the fundamentals getting any bleaker than they are now. But prices seem hesitant to push much below $45. Why? It is our opinion that the worst of the supply side story has been priced and the news over the next three to six months could be, how do we say, "less bearish." What is driving the supply glut? The first thing you should realize about the current glut in oil is that Saudi Arabia is driving the boat. It was the Saudis choice to ramp up production instead of cut back to support price last year. It is speculated they did this to accomplish three main objectives. Punish Russia for its support of SyriaPunish Iran for its nuclear programSlow down the U.S. fracking industry One could argue it has accomplished all three. Russia's economy is in shambles due to slashed oil revenue (amongst other things). Iran is not as bad yet, but getting there. As for U.S. frackers, their eyes are watering. Plummeting U.S. rig count — how low prices cure low prices In the U.S., many fracking operations cannot survive with prices under $60 and recent data confirms it. The U.S. oil-rig count has fallen by 24% since hitting highs in October. Current U.S. rig count stands at 1223 rigs. (Source: BakerHughes). For a more dramatic example, Canada's rig count is down by over 65% since last year. That trend will continue as long as oil remains below $60 and potentially below $70. This will eventually start to choke off a new supply of oil, allowing inventories to begin to draw down again. If you need a better example of how low prices cure low prices in a free market economy, look no further. At the same time, fiscal budgets for the Saudis and their allies rely on oil prices at $70 or $80. They can get by at $60, but not at $45. Thus far, they have been willing to take the short-term pain to punish their enemies and pare back their competitors. But they can't take it forever. January's announcement by OPEC Secretary General el-Badri that oil prices will "go back to normal very soon" was more likely aimed at his unhappy OPEC members than anyone else Seasonal factors favor bulls Near-record supply builds in the U.S. have not been helped by low refinery operating rates in January as refineries shut down for maintenance. Part of this maintenance is recalibrating plants toward gasoline production over heating-oil production. U.S. refineries tend to ramp up operating rates in the spring in an effort to boost gasoline inventories for summer driving season. This year shows early signs of increased operating rates. In the winter months, refineries typically begin to ramp up production of gasoline in order to have enough inventory on hand to meet summer demand needs. Indeed, refiners seem to be eager to put excess crude supplies to work as operating rates climbed 1.9% last week to 89.9%. This compares favorably with rates last year at this time at 86.1% and a five-year average of 83.38%. This ramp up in refining rate tends to increase demand for crude in the spring and has historically tended to support crude prices (see chart below). Higher demand at lower price levels While global demand is flat, U.S. demand for gasoline is strengthening at lower price levels as is evidenced by the chart below. Gasoline demand is up in early 2015 due to both a recovering U.S. economy and low gasoline prices. Note the 2014 demand surge as oil prices fell. Average total gasoline demand for the past four weeks was up 6.26% compared to the same period last year. This is a trend that should continue and likely be witnessed globally in 2015 (see The Big Picture column in the February newsletter.). Outlook We see the following four factors combining to support oil prices in the coming months: Falling rig counts in North America beginning to curb U.S. production (and discourage new rig operators)OPEC suffering with prices below $60, even with the Saudis responsible for the price pressureOil price decline of over 50% could be enough to price current fundamentals price current fundamentalsGlobal Demand beginning to increase as lower prices and recovering economies spur demand Strategy Are prices at a low? They may or may not be. But our research has convinced us we are at least in the neighborhood of a low. While this does not necessarily mean oil prices are in for a sweeping reversal, it does mean it could be a good time for investors to go shopping. Selling the July crude oil $30 put By that we mean futures traders can use the next test of the lows as a potential buying opportunity with stops placed below the recent low. Our recommended strategy, of course, favors selling put options beneath the market instead, thereby avoiding the game of trying to pick the absolute bottom. We like selling the July $30 puts for premiums in the $450-$500 area. Selling puts at this level allows you to profit as long as prices remain above the $30 level. Heading into inventory accumulation season for gasoline, that's a bet we'll take. Price Chart Courtesy of CQG, Inc.Fundamental Charts courtesy of The Hightower Report