Another Chance for $20 Oil

Recently, crude dropped as low as $42.50 a barrel. The trend continues to be mostly down. Reasons for the fall have included on ongoing war between U.S. shale producers and Saudi Arabia, a fall of in demand in some parts of the world that continue to have slow economies, and supply gluts so large that oil tanks are filled close to capacity. Several, or all of these, could be factors in a much more dramatic drop.

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In early February, a Citigroup analyst said $20 oil was entirely possible. According to a Bloomberg article posted on February 10:

The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude.

Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out.

Just this week, another analyst spoke about the chance of another dramatic drop in prices. CNBC reported:

A strengthening dollar and economic weakness in Europe and China could drive crude prices as low as $20 per barrel, according to Raoul Pal of The Global Macro Investor newsletter.

The dollar has been climbing recently against the euro and the yen, pushing oil prices lower and sending fear across the markets. He said crude could still fall another 60 percent before the downturn is done.

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Forecasters of $20 oil are in a minority at this point. Most experts expect a modest drop. Some also forecast a sharp rise.

When oil was just below $100 in June of last year, it would have been hard to find a forecaster predicting a 55% drop in prices over the following nine months. Yet, the drop happened anyway. Why not another 50% drop?