Oil prices may fall another 50 percent from their current levels of about $40 a barrel if the world runs out of storage space and mild weather reduces heating demand.
"Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production,"
writes Ambrose Evans-Pritchard in the U.K. Daily Telegraph. “Risks of a sharp leg lower remain elevated.”
U.S. storage facilities are being tested.
“America’s storage sites are 70 percent full, in theory leaving room for another 150 million barrels. But this is already tight enough to create regional bottlenecks,”
writes Evans-Pritchard. “It will not be sufficient if OPEC continues to flood the global market in a bid to drive out rivals.”
Energy producers are pumping out 2 million barrels a day more than is needed by industries and consumers worldwide. Saudi Arabia and its Persian Gulf allies have maintained their output to pressure U.S. shale drillers.
But the U.S. shale industry has remained resilient even with the collapse in oil prices from a peak of $107 a barrel in 2014. It can rapidly redeploy its wells if the price recovers.
“OPEC was slow to understand the rising threat posed by the U.S. shale industry. It may now have misjudged its resilience,” says Evans-Pritchard. “Frackers have been quick to cut costs with multiple pad-drilling, and they can revive production relatively quickly as soon as prices recover.”
El Nino, the periodic warming of Pacific waters, is
forecast to be especially strong this year, reducing the need for heating oil. Slowing growth in China will also dampen demand for energy, even as the country buys 200,000 to 300,000 barrels a day for its strategic reserve.
“It is unclear exactly how much more space China may have,” says Evans-Pritchard. “Reserves cover just 50 days demand, far short of the 90-day minimum recommended by the International Energy Agency.”
Meanwhile, Saudi Arabia is working with other OPEC members and producers from outside the cartel to stabilize the market, according to Bloomberg News.
The global economy is going through an unstable period, Saudi Oil Minister Ali al-Naimi said. Demand for oil is forecast to rise by 1 million barrels a day every year until 2020, and the world requires more investments in oil to compensate for declining recovery rates, he said.
“Saudi Arabia is a very reliable supplier. We cooperate with OPEC and non-OPEC countries to stabilize the market,” al-Naimi said at a conference in Manama, Bahrain, according to Bloomberg. “We need billions of dollars to continue exploration and producing oil and to invest in spare capacity to stabilize the market.”
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