Citi: Oil Could Hit $20

Citi commented on the prospects for a recovery in oil prices on Monday and what shape it might take.

A 'Head-Fake'

Analysts, led by Edward L. Morse, felt the “recent rally in crude prices looks more like a head-fake than a sustainable turning point" with a decline in rigs, upstream capex cuts, technical indicators and covering of shorts attributed to the recent jump in prices.

More than the above marginal changes are at work in the global oil market.

The analyst note cited the U.S. shale revolution as the "most geopolitically disruptive oil market force in nearly half a century."

Related Link: What's Happening To Oil Prices?

With the U.S. increasing oil production and Saudi Arabia's refusal to reduce its market share, it "was only a matter of time for the oil market to have moved from a relatively tight market for light, sweet crude to a glutted market," according to Morse.

With the U.S. growing output to over 1 million barrels per day, the "unconventional supply revolution created a sort of existential threat to Saudi Arabia and OPEC, which need to find a way to reduce the market share of the new suppliers" in order to maintain the life of existing oil fields.

The analysts forecasted $40 oil between the end of Q1 and start of Q2, “after which markets should start to balance, first with an end to inventory builds and later on with a period of sustained inventory draws.”

Calling A Bottom

Morse cautioned, however, that it is impossible to call a bottom in the market and, as a “result of oversupply and the economics of storage,” the price for WTI could temporarily fall into the $20 range.

The firm reduced its base case to $54/bbl for 2015 but saw Brent in 4Q 2016 at $75/bbl, which would be “closer to a V-shaped than U-shaped recovery despite overall bearish and bullish supply uncertainties.”

Beyond 2016, Morse suggested the potential for a W-shaped recovery with sharply higher prices that would lead to increased production in North America.

In such a scenario, and with all other things being equal, this could cause another decline in prices and a moderation in both U.S. and world production.

Where Could Prices Land?

Prices may then land in the $70-$90 range over the long term, according to the analyst note.

Morse concluded: "All other things may not be equal – ‘W’ could also stand for ‘wildcards,’ with potential problems for supply out of Iraq, Libya, Iran, Venezuela or elsewhere."

These developments would take place in a world with shale production as a significant factor that may prevent OPEC from driving prices higher to maximize revenue. Morse noted that "many analysts have seen in past market crises 'the end of OPEC', this time around might well be different."

The United States Oil Fund LP (ETF) USO recently traded at $19.76, up 1.52 percent on Monday.

Image credit: Public Domain