Oil Prices Continue to Plummet. Is $45 per Barrel out of the Question?

The price of crude oil continues to fall. We are now pushing $60 dollars per barrel, well below my initial target of $70 per barrel. So what is next? We could now expect the fall to continue another 35 percent to at least $45.

The price of crude has now dropped to near 4 year lows and analysts are cutting forecasts. This is making investors and traders sell the black gold pushing the price lower and lower. This price war is going out of control and if it continues then price will dip further well below $50 per barrel then $45 is not out of the question. Some analysts are slashing their price forecast to $40, I think we will get support closer to $45.

In order to reach these levels we need to see a real lack of consumer confidence in in global economies and a lack of confidence in WTI pricing power. So far today, Brent and WTI crude continue to tumble. Both are more than two percent lower at $67.91 and $64.11, at the time of this report in early Asian trade. We have not seen these price levels since 2010 in the middle of the European debt crisis.

The price of crude, globally, has been plunging since the June peak near $115 per barrel. Brent crude is now down near 33 percent. We are noting weak global demand, a boom in the U.S. Dollar as well as strengthening U.S. oil production driving the price down.

With prices at this level, we are now entering a new era, or chapter for world oil markets.

Here Comes OPEC’s All out Price War

In order to maintain their market dominance, Saudi Arabia through the oil cartel OPEC have started a price war. They have cut the selling price to customers for four months in a row and have kept production constant. This will be very detrimental if not toxic for U.S. shale oil companies as they will have trouble paying their debt and forcing more bankruptcies.

One of the reasons for the drop in crude prices is supply. The U.S. has increased oil production, as has Canada. This is adding to the global inventories and causing a glut. The United States now produces almost 8.9 million barrels per day. Oil production in Saudi Arabia is nearly at 9.6 million barrels per day.

Bottom line, we can blame traders for the drop in price. We have low volumes and a fast pace of price decline based on panic. We are seeing traders hedging thanks to the volatility towards the downside. This will help bring the price of oil to a level not seen in over a decade.

Market Rebalance on the Horizon in 2015

The price will not drop forever. It is expected they will recover and the price of WTI will trade around $75 per barrel by mid-2015. How will we get this rebalance? We will see a scale back in shale oil production, out of the U.S. and as the threat of that on OPEC diminishes, then OPEC will announce supply cuts. Saudi Arabia wants to end shale oil production in the U.S. and keep their market dominance. Once that happens, they will look to cut back on production and raise the price of oil. This means we should not be overall secure in the low prices in crude. As fast as price fall, it can reverse on a dime and climb higher. Remember the price fall and recovery of 2008?