Crude Economics
Is That $20 Oil on the Horizon?

It’s been a terrible week for oil prices, the latest development in the long run of declining prices stretching all the way back to June of 2014, when Brent crude was trading above $110 per barrel. Today Brent is trading below $37 per barrel, while America’s West Texas Intermediate hovers around $34.50. There’s no great secret to today’s bearish market—supply still grossly outpaces demand. And, as the FT reports, it doesn’t seem we’ve seen the bottom of this slide quite yet:

Banks such as Goldman Sachs and Citigroup are among those that have said the oil overhang could push crude prices down to $20 levels.

“We still see high risks that prices may decline further, as storage continues to fill,” said Damien Courvalin at Goldman Sachs. Although growth in US production is weaker, it has not fallen enough, meaning the market will take longer to rebalance, said Mr Courvalin.

Higher Opec production, including additional barrels from Iran, is another risk factor for 2016, he added.

No one in OPEC is willing to make production cuts—least of all Saudi Arabia, the only country capable of scaling output back enough to send prices upwards. In fact, with Western sanctions set to be lifted from Iran sometime in the coming months, we can expect even more supplies out of OPEC in 2016.

Outside of OPEC, suppliers are still drilling crude as fast as they can, with Russia hitting post-Soviet production records and U.S. shale producers defying expectations by avoiding a drastic drop in output. The impending end to the ban on U.S. oil exports will eventually help give American production a slight boost, too.

Brent crude started 2015 out at $55 per barrel, and it looks to end the year well below $40. Thanks to copious supplies, it looks like 2016 could see prices plunge even further.

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