The plunge in oil prices, which has been accelerated largely by excess supply caused by America’s shale oil revolution, may not be over just yet. In a note Monday, Ed Morse, global head of commodity research at Citigroup (C) and one of the more influential analysts in the energy space, wrote that oil prices may dip to $20 p/b and the “end” of OPEC may be near.
“It’s impossible to call a bottom point, which could, as a result of oversupply and the economics of storage, fall well below $40 a barrel for WTI, perhaps as low as the $20 range for a while,” Morse said, noting that the recent rally in crude prices “looks more like a head-fake than a sustainable turning point.”
WTI crude oil traded below $52.50 a barrel on Tuesday, advancing by nearly $10 p/b since late January vs $107 a barrel as recently as June.
Morse said that markets have, in Citi’s view, “correctly depicted the heart of the lower price oil environment as a result of a conflict between markets and marketing influence, or more directly between the impacts of the shale revolution on OPEC’s ability to drive a significant ‘permanent’ wedge well above production costs to maximize revenues for OPEC and other oil-producing countries.” Morse believes that regardless of the ultimate outcome, “it looks exceedingly unlikely for OPEC to return to its old way of doing business. While many analysts have seen in past market crises ‘the end of OPEC,’ this time around might well be different.”
Citi’s official forecast for when oil will end the 2Q (after that possible dip to $20) is now $35 a barrel, down from a previous forecast of $47 a barrel.