Oil as Low as $20 Seen by Citigroup

Oil may drop more than 50 percent to “the $20 range” by the start of the second quarter as oversupply fills storage tanks close to capacity, Citigroup Inc. said.

Signs of a slowdown in U.S. drilling don’t mean the crude glut will be eliminated, Edward Morse, Citigroup’s global head of commodity research, said in a report e-mailed Monday. Recent gains in oil, following a seven-month decline to the lowest price since 2009, appear “more like a head-fake than a sustainable turning point,” he said.

West Texas Intermediate crude slid 46 percent last year as the Organization of Petroleum Exporting Countries resisted calls to cut supply as it competed for market share against U.S. drillers pumping at the fastest rate in more than three decades. There will be an oversupply of about 2 million barrels a day in the first half of 2015, Iranian Oil Minister Bijan Namdar Zanganeh said in an interview on state TV Feb. 4.

“Not only is the market oversupplied, but the consequent inventory build looks likely to continue toward storage tank tops,” Morse said. “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.”

Rig Count

WTI for March delivery rose 0.3 percent to $51.83 a barrel by 9:14 a.m. London time in electronic trading on the New York Mercantile Exchange. The U.S. benchmark gained 7.2 percent last week, the biggest weekly advance in four years, as U.S. producers pulled rigs off oil fields for a ninth week.

Drillers idled 83 rigs last week, cutting the total number in operation to 1,140, the lowest since December 2011, according to data from Baker Hughes Inc. Friday.

Oil should bottom between the end of the first quarter and beginning of the second quarter in the $40 range, Morse said. At that point, the market should start to balance, first with an end to inventory builds and later on with declining stockpiles.

U.S. crude inventories expanded by 6.33 million barrels to 413.1 million in the week ended Jan. 30, the highest in weekly records compiled since 1982, Energy Information Administration data show. Crude output rose 27,000 barrels a day to 9.21 million a week earlier, the most in weekly estimates that started in 1983.

Oil supply will probably exceed demand by 700,000 barrels a day in the first quarter and 800,000 barrels a day in the second quarter, Morse said in the report. Stockpiles at Cushing, Oklahoma, the delivery point for WTI, have climbed 29 percent this year to 41.4 million barrels by Jan. 30, according to EIA data. They are “heading toward tank-tops,” according to Morse.

 

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