Oil Prices: Is Oil About to Hit $20?

Oil Prices About to HitOil Price Forecast: WTI Could Fall to $20

Global oil prices continue to defy all rationalization, as predictions fall flat on their face and both West Texas Intermediate (WTI) and Brent are displaying extreme volatility. Crude oil is now at its lowest price level in 11 years, but oil is likely to go lower before things get better.

So many questions have arisen that it has become difficult to address them with any real confidence. Has the oil price found its bottom and is $35.00 per barrel representing the new normal for WTI?

It seems that everyone has their own pet theory about where exactly oil prices are heading these days, as bears and bulls alike are keeping their attention firmly zeroed in on news from the Organization of Petroleum Exporting Countries and the data coming out of organizations such as the Energy Information Agency (EIA) and International Energy Agency (IEA). OPEC appears to be in the middle of an identity crisis, as the oil cartel can’t seem to figure out, as a real unit, if it’s supposed to act as the global swing producer or sit meekly by and hope its members can survive the ongoing oil price crash.

To clear the confusion, I’d like to remind you that OPEC can still be the overwhelming market mover, but the organization is plagued by internal divisions that promise little relief coming out of the cartel’s corner.

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The Elephant in the Room: OPEC

For the moment, OPEC has ramped up production to near-record levels, pumping out approximately 31.7 million barrels per day. (Source: “Monthly Oil Market Report,” OPEC, December 10, 2015.)

This represents an increase of one percent over November’s numbers, despite the oil price having crashed by more than 20% since then. It’s also five percent above last year’s numbers. (Source: “Monthly Oil Market Report,” OPEC, December 10, 2014.)

Much of this pumping activity can be attributed to Saudi Arabia and Iraq producing oil with reckless abandon and flooding international markets, but there is also the looming shadow of an Iranian return to the petroleum gain once sanctions on its crude oil exports are lifted in 2016. With investors looking to cash in on the bonanza that that country’s coming in out of the cold represents, you can be sure that it will be yet another brutal punch to the gut for slumping oil prices in the New Year. (Source: “Iran crude exports on track to hit 6-month high in Dec -source,” Reuters, December 14, 2015.)

And it’s not just OPEC. From a global perspective, the signs of severe strain are visible everywhere and only getting worse. U.S. crude oil stockpiles are now at their highest level in more than eight decades (Source: “Crude Moves Out to Sea as Inventories Swell,” The Wall Street Journal, December 11, 2015.)

Worse yet, oil storage levels have hit a catastrophic 97% capacity in Western Europe and the total oil inventories in the Organisation for Economic Co-Operation and Development (OECD) countries are more than 250,000 barrels above the five-year average. (Source: “Oil Market Report,” IEA, November 13, 2015.)

At this rate, all that’s saving us is the rather odd practice of buying oil and storing it offshore in tankers until the price rebounds. Onshore storage capacity could be seriously tested as early as the first quarter of next year, a shocking development if it were to occur.

It’s difficult to pinpoint why exactly OPEC has not stepped up to end the oil price collapse, as data suggests the cartel has lost approximately $500.00 in 2015 alone, with no end in sight for the moment. The implicit leader of the group, Saudi Arabia, is burning through its impressive cash reserves as the country predicts a massive $100+ billion budget deficit for 2015 and 2016. (Source: “Saudis to set strategy for era of cheap oil as red ink flows,” Reuters, December 13, 2015.)

At this rate, International Monetary Fund data forecasts that if there is no substantial uplift in the oil price and spending levels continue, the kingdom will absolutely run out of cash in less than five years. (Source: “4. Fiscal Adjustment to Lower Oil Prices in MENA and CCA Oil Exporters,” IMF, last accessed December 18, 2015.)

The Saudi budget for 2015 will be hammered by a deficit equal to 20% of its gross domestic product (GDP). While the Saudis, along with the other oil-producing Gulf States, have tremendous amounts of money, the rate at which the oil price crash could eat away at it could lead to catastrophe.

Whatever the ultimate Saudi Arabian strategy is, it has only just begun. Early indicators suggest that there is a return being generating and it all boils down to non-OPEC producers simply feeling more pain than the cartel’s producers. The non-OPEC oil supply for 2016 is now forecasted to suffer the largest nosedive in more than 20 years and will fall by an estimated 500,000 barrels per day. (Source: “IEA releases Oil Market Report for September,” IEA, last accessed December 15, 2015.)

U.S. shale producers are among those feeling the most pain at the moment, with production across the seven largest American shale plays now estimated to drop by 116,000 barrels per day next month. (Source: “Drilling Productivity Report,” EIA, December 7, 2015.)

The Bottom Line on Oil Prices

Much can be said about the ongoing oil price crash and very little of it will be comforting for those relying on a quick rebound in 2016. With ongoing global oversupply, geopolitical volatility, and economic slowdowns in emerging markets, the ongoing record production rates mean oil is likely to drop even further than it already has.

With WTI hovering right under $35.00 at the moment, I wouldn’t be surprised if we see oil crashing into the $20.00s sooner rather than later.

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