Oil Prices: Could Oil Prices Hit $20? It’s Possible

Oil priceJust How Low Can Oil Prices Go?

Oil prices broke through a pivotal barrier several times this week, as crude oil briefly sunk below $40.00 per barrel. With a variety of negative factors heavily weighing down on the oil price forecast, it looks as if things will get worse before they get better.

But just how bad are we talking about? If certain conditions are not corrected soon, we could be seeing oil prices nosedive to as low as $20.00 per barrel.

In perhaps the best indication of widespread bearishness towards the oil price forecast, WTI for December delivery went for as low as $39.89 on the NYMEX. This is the biggest dip since August, when WTI oil prices was also tanking. Brent crude, the global oil benchmark, settled at $44.18 per barrel on ICE Futures Europe.

But are we really heading towards an oil price crash? Let’s take a look at the facts.

Global Oversupply: There’s Simply Too Much Oil

What has investors and analysts worried are the growing global stockpiles of oil, as data indicates world supplies continue to grow at a record rate.

Looking at the U.S. storage situation, it becomes abundantly clear that it will take a significant market correction to whittle down massive crude oil stockpiles. Crude oil levels at Cushing, Oklahoma, North America’s largest oil storage facility, grew by an estimated 2.1 million barrels during the week ended November 17. (Source: “Oil Prices Slip on Bearish Inventory Data,” NASDAQ, November 19, 2015.) Storage issues have gotten so bad, in fact, that more than 100 million barrels of crude oil are estimated to be sitting in offshore tankers, awaiting a rise in oil prices, which may never come. (Source: “Oil price: why it could collapse to $20 a barrel,” The Week, November 20, 2015.)

Data from the Energy Information Administration (EIA) indicates that U.S. crude stockpiles rose by 300,000 barrels last week, which contradicted an American Petroleum Institute report that had concluded there had been a draw. (Sources: “Weekly Petroleum Status Report,” EIA, last accessed November 20, 2015; “Oil market pares gains following U.S. stockpile report,” CNBC, November 20, 2015.)

What is becoming increasingly clear is that the volume of oil is weighing heavily on markets, exacerbating the already alarming issue of a supply-and-demand imbalance. While markets are dealing with a glut of oil and lagging demand, the growing levels of the black gold add an additional layer of anxiety to markets roiled by the oil price crash in the summer of 2014.

Oil Prices Are Being Artificially Propped Up

So with this much negative pressure on the oil price forecast, how has WTI crude managed to stay around the $40.00-per-barrel mark?

There are several compelling reasons for this price level making little sense. Oil is essentially floating above the $40.00 price line for technical reasons, where trend-based analysis trumps reality. Rather than accounting for the realities of the supply-and-demand dynamics, traders are moving oil according to momentum, patterns, and, of course, historical pricing.

wtic oil price chart

Chart courtesy of www.StockCharts.com

All eyes will now be on the upcoming December 4 meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria.

What needs to happen is that Saudi Arabia needs to show a willingness to cooperate over a broad and coordinated slowdown in oil production. What will likely happen, however, is nothing. The kingdom will continue its disastrous policy of maintaining market share by producing record levels of oil and undercutting rival exporters.

Oil Price Forecast: Fed Rate Hike Could Set Off Oil Price Crash

As the likelihood of a U.S. Federal Reserve interest rate increase for December rises, so, too, do the negative implications for oil prices. (Source: “Expect a ‘one-and-done’ Fed rate hike: Strategist,” CNBC, November 20, 2015.) This is because a rate hike will cause the U.S. dollar to rise in value, and because oil is denominated in U.S. dollars on the international stage, this will make it more expensive globally.

So let’s take a quick recap of the oil price situation as it stands. Global crude stockpiles are approaching historical highs, a forecasted mild winter with the accompanying drop in demand for oil is coming, and an interest rate rise would almost certainly drop demand for oil even further. (Source: “Oil traders prepare for next big price drop in March 2016,” Reuters, November 19, 2015.) Now, throw in the fact that December’s OPEC meeting is an almost certain fail in achieving any worthwhile policies and you start to get a rough idea of just how bad things have gotten.

Long-term demand growth is unlikely to be stellar. The International Energy Agency (IEA) estimated that oil demand will only begin rising in a significant way after 2020, with just an average 900,000 barrels per day annual rise from now until then. (Source: “Oil price to recover to $80 only by 2020: IEA,” CNBC, November 10, 2015.) This will grow to total global crude oil demand of 103.5 million barrels in 2040. For comparison, oil demand for 2015 stands at 94.5 million barrels a day.

Translation: demand for oil is unlikely to provide the relief that energy markets so desperately need.

The Bottom Line on the Oil Price Forecast

In short, there are too many negative factors all coming to a head in December. Once oil prices close at less than $40.00 per barrel, all bets are off. How low it could go, however, is a subject of considerable debate.

What we do know is that demand is unlikely to pick up and with global economic growth forecasted to slow down in 2016, bearish market conditions for oil will only continue to weigh down oil prices. Simply put, we could easily see prices crash below $20.00 per barrel.

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