The possibility of USD20 oil doesn't sound so crazy anymore

The world mostly ignored Ed Morse 11 months ago when the head of commodities research at Citigroup said oil could drop as low as USD20.

It’s paying attention now that crude has tipped below USD30.

BP Plc slashed 4,000 jobs, Petroleo Brasileiro SA slashed its spending plan and Petroliam Nasional Bhd. warned that it faces several tough years before crude futures in the U.S. sank into the USD20s for the first time in more than 12 years.

Morse, who wrote in a Feb. 9 research note that oil could fall "perhaps as low as the USD20 range for a while," said Tuesday in Calgary that the world is now “confronting USD20 oil."

“The USD20 number is something you have to talk about,” Morse said.

“When you’ve seen a USD10 price slide and WTI is trading just slightly above USD30, the likelihood is fairly great. Clearly oil markets cannot maintain a price at below the USD30 level for very long. The question is how much longer.”

West Texas Intermediate fell as low as USD29.93 a barrel before settling at USD30.44 Tuesday, the lowest level since December 2003.

Prices on Wednesday were up 0.9 percent at USD30.72 as of 12:14 p.m. in Tokyo.

Financing Challenges

Low oil prices could cause problems for U.S. oil companies with debt covenants that specify certain debt-to-earnings ratios or interest coverage, and will make it even harder for those companies to obtain financing to continue to operate, said Mark Sadeghian, a senior director for the energy and commodities group at Fitch Ratings Ltd.

The Bloomberg Commodities Index on Tuesday fell to the lowest level since at least 1991 as demand from slowing emerging-market economies fails to keep pace with a flood of supply from investments made during the price boom of a half-decade ago.

Malaysia stands to lose 300 million ringgit (USD68 million) for every USD1-a-barrel decline in crude, according to government estimates.

ConocoPhillips is losing USD1.79 billion in net income each quarter for every USD10 drop in prices, according to analysts at Barclays Plc.

Petrobras, as Brazil’s state-controlled oil producer is familiarly known, cut its five-year business plan to USD98.4 billion, the latest adjustment to the original USD130 billion announced last year.

The U.S. Energy Information Administration reduced its forecast for WTI prices for 2016 by 24 percent to USD38.54 a barrel.

In its monthly Short-Term Energy Outlook, the agency said the oil market would come back into balance in 2017.

The call for oil in the USD20s grew louder in recent months, with Goldman Sachs pinning a 50 percent chance of oil falling to USD20 in September and Morgan Stanley saying Monday that a strong dollar could drop oil below USD30.

Morse was first with the USD20s call, although he said last February that it could happen in the first half of last year followed by the market balancing.

“Right now the real driving factor is access to capital markets,” Sadeghian said by phone from Chicago.

“USD20 oil just digs an even deeper hole from where you need to be before the markets open up again.”