Oil prices may fall to $20 and the “end” of OPEC may be near, according to a shocking report from Citigroup on Monday.
The move higher in oil since the end of last month was nothing more than short covering and a response to cuts by energy companies, wrote Edward Morse, one of the more influential analysts in the energy space.
“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. “The recent rally in crude prices looks more like a head-fake than a sustainable turning point.”
WTI crude has surged 22 percent to almost $53 a barrel since falling below $44 a barrel on Jan. 29. Prices are still down 46 percent over the last six months.
Citi’s official forecast for when oil will end the second quarter (after that possible drop to $20) is now $35 a barrel, down from a previous forecast of $47 a barrel. WTI will then rebound to end the year at $57 a barrel. It will get back to $66 by the end of 2016, forecasts Morse.
In order to follow Citi’s call, the ProShares UltraShort Crude Oil ETFand the PowerShares Crude Oil Double Short ETN are inversely correlated with the returns for crude.
The call for another extreme drop and then an extreme rebound is similar to what Goldman Sachs told clients at the end of last month when the firm predicted oil would fall to $39 a barrel at some point in the first half of the year and then recover to $65 before the end of the year.
Citigroup calls the development of unconventional oil sources such as shale, oil sands and deepwater drilling “the most disruptive geopolitical factor in markets since the 1970s.”
And despite the best efforts by OPEC and Saudi Arabia not to cut production and accept lower prices in order to pick up market share, the horse is already out of the barn. As soon as the price rebounds, these sources will continue to provide competition to OPEC, which has lost two of its biggest customers, possibly for good, according to Morse.
Saudi Arabia exported 1.6 million barrels a day to the U.S. in 2013, states the report. That fell to to 800,000 barrels this winter. Exports to China are down by half from their peak.
“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. No matter what 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.”