$20 oil or a crude correction? Maybe both

Opec says demand is going up, but Citi thinks a barrel of WTI could fetch as low as $20 this year.

by Rachel Savage
Last Updated: 11 Feb 2015

It is a truth universally acknowledged that nobody really knows what’s going to happen to the price of oil. Of course that doesn’t stop everyone and their mum opining on the matter, but industry-watchers do seem to agree that the black stuff will stage something of a recovery by the end of the year.

Before that happens, though, a barrel of West Texas Intermediate (the American stuff used as one of the global oil price benchmarks) could fall as low as $20 (£13) this year, Citigroup’s head of global commodities research wrote in a research note on Monday.

‘It's impossible to call a bottom point,’ Edward Morse said. ‘The recent rally in crude prices looks more like a head-fake than a sustainable turning point.’

Said ‘head-fake’ rally has been Brent Crude oil climbing from $45 a barrel to more than $58 in the last couple of weeks, having plunged from $114 since last June (with WTI moving in step a couple of dollars lower). That has had people scratching their heads over whether it’s down to bets that the price would fall that low being paid out or a sign of a full-blown recovery.

But while Citi is predicting WTI will fall to $35 by the end of the second quarter, Morse also thinks it will be back at $57 by the end of the year and $66 by the time 2016 is out.

Morse also had some strong words for oil cartel Opec, which is effectively headed up by Saudi Arabia. ‘No matter what the ultimate outcome, it looks exceedingly unlikely for OPEC to return to its old way of doing business,’ he warned ‘While many analysts have seen in past market crises 'the end of OPEC,' this time around might well be different.’

Opec, on the other hand, has refused to cut production, and so push prices back up, in an effort to force more expensive producers, particularly US frackers, out of business. And lo and behold it said yesterday, in its closely-watched monthly report, that American production growth was slowing while demand for its oil was up.

‘There are strong indications that US shale producers are taking a hit, and by the second half of this year… demand will rise for OPEC members,’ an OPEC official told the Wall Street Journal – anonymously natch.

But the International Energy Agency (the UN of the energy world) said US shale gas producers would come storming back on stream in 2017 when prices recover.

The price correction will cause the North American supply ‘party’ to mark a pause; it will not bring it to an end,’ the agency said. A recovery in energy prices was ‘inevitable,’ it said, although not necessarily back to $100-plus. And no surprises for the country the IEA thinks will be the 'top loser' from low prices - Russia.

In the short term, then, what’s going to happen to oil prices is about as clear as crude. But eventually there is only one way for them to go: up.

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