After tumbling to six-year lows, U.S. benchmark oil prices must fall even further before producers begin reigning in production, according to Ed Morse, head of global commodity research at Citigroup Inc.
Oil must slip below $30 a barrel for output to start falling, Morse said Thursday at a Platts oil conference in New York. There are reasons to believe that will happen.
West Texas Intermediate crude has fallen 25 percent this year, hitting a six-year low, as inventories remain about 90 million barrels above the five-year average. Production is more than 8 percent higher than a year earlier.
“I wouldn’t be surprised if WTI drops below $30 later this year before rebounding,” Morse said. Prices above $30 won’t trigger output cuts, he said.
After reaching $61.43 on June 10, the high this year, WTI has fallen 31 percent. Oil climbed $3.96, or 10 percent, to close at $42.56 a barrel Thursday on the New York Mercantile Exchange. Crude sank to $38.24 on Aug. 24, the lowest since February 2009.
Even while crude stockpiles fell by 5.45 million barrels last week to 450.8 million, oil in storage remains above the five-year average, the Energy Information Administration reported Wednesday. Stockpiles at Cushing, Oklahoma, the nation’s biggest storage hub and the delivery point for WTI futures, expanded for a second week to 57.7 million barrels.
The price collapse has confronted Saudi Arabia with an “existential crisis,” Morse said. The world’s largest oil exporter has been forced to choose between trimming production and losing market share to competitors.
“Non-OPEC production is just not showing declines,” Morse said. “There’s been no real rollover except in Mexico.”
The Kingdom has lost market share in the U.S. and China, the world’s top consumers. In the U.S., Saudi oil has been displaced by domestic shale production while Russia has expanded sales in China, he said.
“In a slow demand growth environment where you’re long oil, it makes sense to go for market share,” Morse said.
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