(Reuters) - Citibank on Monday cut its crude price forecasts, saying West Texas Intermediate (WTI) could go as low as the $20 per barrel range before recovering to reach a new equilibrium.
The oil market should bottom between the end of the first quarter and beginning of the second quarter this year.
“It’s impossible to call a bottom point, which could, as a result of oversupply and the economics of storage, fall well below $40 a barrel for West Texas Intermediate, perhaps as low as the $20 range for a while,” the investment bank said in a note to clients.
The recovery is most likely to take a W-shape, the bank said, with a cut of shale output triggering a price response that in turn results in a U.S. supply increase, creating another price dip with eventual recovery to a new equilibrium level.
Shale producers may end up cutting rigs by about 50 percent. These cutbacks could slow U.S. production growth to 800,000 barrels per day in 2015 for crude and NGLs and 450,000 bpd in 2016, Citi said.
Faced with falling prices, shale producers might drill wells in the second quarter of 2015 and not complete them, waiting to bring them online when prices recover.
“Given the lagged supply response, storage is needed to bridge the gap until the supply-demand overhang shrinks and reverses,” said analysts led by Ed Morse. A lack of storage may be a major obstacle in the second quarter, and could cause a “production crunch,” the analysts said.
The lack of storage could cause a steeper contango in the market, which could further incentivize U.S. producers to drill wells and leaving them uncompleted, creating a kind of in-ground storage play.
The investment bank lowered its 2015 average Brent price forecast to $54 per barrel from $63 and trimmed its 2016 price outlook by a dollar to $69 per barrel.
Citi also cut its 2015 WTI price forecast to $46 per barrel from $55 per barrel earlier; while lowering its 2016 outlook to $61 per barrel from $62.
The bank said it expected non-OPEC supply to decline by 200,000 barrels per day by 2016 partly due to U.S. shale curtailment.
“In this new ‘shale era’, U.S. shale looks like it could outperform expectations in the future, while global non-OPEC non-shale supply could underperform as decline rates increase,” the analysts said, adding that long-term, this allows more room for U.S. shale to grow.
Reporting by Vijaykumar Vedala in Bengaluru and Jessica Resnick-Ault in New York; Editing by Gunna Dickson and Andrew Hay