Oil could sink to $45 a barrel within 12 months

Oil could be back to US$45 a barrel within 12 months, Citigroup’s commodities Chief Ed Morse said in an interview monitored by National Daily, noting that the bullish case for crude is based on a faulty analysis.

The top oil forecaster who warned about the 2014 price collapse and also accurately predicted that the OPEC+ club would end its production cut deal earlier than everyone expected, has said that the capital efficiency and technological advancements that have improved oil recovery goes against the bullish scenario, because the better the recovery rate, the more oil that can be produced on the cheap.

Also, he said, the bulls make a mistake in estimating a global acceleration in total oil production decline when this acceleration will only take place in mature fields, which represent about 45-50 percent of the global total.

It is illogical, Morse said, to forecast a decline of production in places where production will not be declining, such as the Canadian oil sands. The analyst also noted OPEC as a case in point, given, he said, its ability to consistently produce an average 35 million bpd over a 50-year period.

The assumption of a decline rate of 5 percent for these mature fields yields a supply fall of 2-3 million bpd, which is about half of what bulls are forecasting based on their all-embracing assumption of production decline.

Citigroup’s commodities head allowed that spare capacity is a legitimate concern in global oil, but he added that deliverability is the real issue and it is actually looking good at the moment.

Saudi Arabia, he said, can deliver 15 million bpd through its ports and has some 300 million barrels of crude in storage at home plus more abroad. In other words, the Kingdom could hypothetically deliver 15 million bpd, but it is only producing 10.8 million bpd.

In the immediate term, however, Morse agrees oil will continue strong. It can’t really be any other way: the supply disruption potential in Libya and Venezuela, the Iran sanctions, and the U.S.-China trade war are all arguments for the bullish case for oil and they will remain on the scene in the next few months.

Next year, however, Morse believes Brent could drop back to between US$45 a US$65 a barrel.