Crude prices are creeping ever closer to $30, with Europe’s Brent benchmark currently trading at $30.67 per barrel and America’s West Texas Intermediate (WTI) now at $30.30. Over the past year and a half, non-OPEC producers (led by America’s upstart shale companies) have pushed supply well past demand, and rather than cutting production as it has in the past, the cartel’s members have boosted their own production to compete for market share. That’s the supply side, but it’s flagging demand that’s now driving prices to 12 year lows, as worries over China’s struggling economy have depressed prices by more than 15 percent in 2016 (the worst start to a year on record). And, as Bloomberg reports, analysts don’t think we’ve seen the worst of it yet:
A rapid appreciation of the U.S. dollar may send Brent oil to as low as $20 a barrel, according to Morgan Stanley […]“Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency,” the analysts wrote in the report. “The U.S. dollar and non-fundamental factors continue to drive oil prices.” […]Oil tumbled last week on volatility in Chinese markets after the country sought to quell losses in equities and stabilize its currency. A 3.2 percent increase in the U.S. dollar — as implied by a possible 15 percent yuan devaluation — may drive crude in the high $20s, Morgan Stanley said. If other currencies move as well, the shift by both the dollar and oil could be even greater, according to the report.
Our own Walter Russell Mead has an essay that’s well worth a read on the popping Chinese bubble. In it, he points out how “the producers of commodities and manufactured goods have bought into the idea that Chinese demand is a perpetual growth machine,” and how that misplaced trust has created a system that is currently reeling from the Chinese economy’s descent from those rarified airs of consistent double-digit annual growth. Oil isn’t the only commodity whose value is plummeting: zinc, copper, and nickel are in similar free fall. This is not an isolated problem, nor is it one that can be contained.But these are especially trying times for oil producers, and OPEC’s petrostates are surely eying today’s market activities with what is becoming a practiced grimace. Indeed, as the Wall Street Journal reports, Nigeria’s oil minister is now floating the idea of an emergency meeting of the cartel, just two months after its scheduled biannual summit in Vienna that produced no agreement to curtail production:
The Organization of the Petroleum Exporting Countries “may hold an emergency meeting in the first quarter if prices remain at current levels,” Nigerian oil minister Emmanuel Ibe Kachikwu said Tuesday at an Abu Dhabi energy conference, according to a recording of his comments.Mr. Kachikwu said two countries—which he didn’t name—had made proposals for a gathering ahead of OPEC’s next scheduled meeting on June 2. The organization controls more than one-third of the world’s crude oil supply and has historically used such meetings to determine production levels as a way of regulating prices.
That idea is already receiving pushback, however, after the United Arab Emirates energy minister insisted the current course of action—pumping business as usual in the hopes of squeezing out competitors similarly beleaguered by low prices—was working. And, with relations between OPEC’s two most important members (Iran and Saudi Arabia) deteriorating, it’s hard to see any sort of production coordination anytime soon.Citigroup’s oil guru Ed Morse has also noted that the world’s increasingly scarce storage capacity for all of this oil could push prices down even further, predicting prices “could fall as low as the $20 range.” Between that, the impending surge in Iranian supply pending the lifting of Western sanctions, and expectations for a torrid next few months for the Chinese economy, $20 oil doesn’t sound so far-fetched.