Oil’s getting hammered by a unique concurrence of demand and supply shocks that could send prices into the $20s, according Ed Morse, Citigroup Inc.’s head of commodities research.
Crude prices were already falling as the global fallout from the coronavirus destroys demand, but the collapse of the OPEC+ coalition and ensuing price war between Russia and Saudi Arabia sent prices 30% lower on Monday. The rout could deepen in coming weeks, according to Morse.
“This is the first time I can recall that there has been a significant oversupply crunch and demand shock at the same time,” Morse said in a phone interview. “The combination is really unusual and makes it more difficult to see how you work your way out of it.”
Morse has seen his share of oil crises, focusing on international energy policy in the U.S. state department starting in the late 1970s, to publishing industry journal Petroleum Intelligence Weekly through most of the 1990s, followed by positions at Hess Trading Co., Lehman Brothers and Credit Suisse Group AG.
Russia on Friday walked away from the OPEC+ alliance to cut output, in place since late 2016, after members of the coalition failed to agree how to respond to the coronavirus. Saudi Arabia retaliated Saturday by slashing its official selling prices and pledging to boost production, effectively declaring a price war.
“The Russian government, for whatever reason, had the view that all the efforts to cooperate with OPEC had failed, since they had given up market share and the U.S. had seized it,” Morse said. The Saudi reaction is “signaling to other producers, and the Russians in particular, that we’re happy to cooperate with you if you want to get back on track. Otherwise, we’re going to screw things up for both of us, for everybody.”
The decision by Saudi Arabia, led by Crown Prince Mohammed bin Salman, will eventually work to pressure Vladimir Putin’s Russia, but there’s no clarity on how long it will take, Morse said.
Oil has now returned to levels that first inspired OPEC and other producers to join forces. That collapse, which began in 2014, was also triggered by a Saudi move to maximize output and crush other producers.
This time around though it’s likely to be a short-lived tactic to get Russia back to the negotiating table, which could take about a quarter, Morse said.
U.S. producers can stabilize supply at $40 a barrel for West Texas Intermediate, Morse estimated. Below that, output begins to decline, with a lag of about six months. WTI on Monday lost as much as 34% to $27.34 a barrel, while Brent fell 31% to $31.02.