With more supply hitting the market, Wall Street is getting more bearish on the outlook for oil prices and some strategists see the market many months away from finding a floor.
The Organization of the Petroleum Exporting Countries strategy of standing back and letting the market determine price has helped drive oil down further and faster than many analysts had expected. Analysts see oil prices weakening further through the second quarter before leveling off and rising in the fourth quarter.
Saudi Arabia Monday cut U.S. and European prices for oil for February delivery, appearing to ratchet up the price war that has pitted OPEC against U.S. shale producers. Saudi Arabia trimmed its official price for light oils by $0.60 per barrel in the U.S.
Citigroup on Monday shaved its forecast to an average Brent price of $63 per barrel this year, from a previous forecast for $80. The analysts said the market should "sort itself out by the end of 2015" and that Brent should trade within a range of $55 to $70, and then average $70 a barrel in 2016.
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The U.S. is awash in oil, with record levels of production meeting a rising tide of imports. West Texas Intermediate futures for February Monday temporarily fell below $50 per barrel, a key psychological level and downside target of some analysts.
"Now there are signs that Saudi Arabia might be increasing its market share on the U.S. Gulf Coast once again, adding further to price pressures in the U.S. market, with direct ripple effects in global markets in Q1," wrote the Citigroup strategists.
Brent futures, in free fall Monday, have already sunk below $55 per barrel, losing more than 6 percent to just below $53 per barrel. WTI futures settled at $50.04 per barrel.
From a technical perspective, the next target in WTI is north of $48 per barrel, but there is a case to be made for the low $30s per barrel.
"The ultimate target is now $33. That's how it sets up on the charts and that's a pronounced double bottom," said John Kilduff of Again Capital. He said the market consolidated in December but is now set on forging new lows. WTI closed at $33.98 on Feb. 12, 2009, and it is now trading at levels last seen in April 2009.
As the charts look bearish, the fundamentals are also more bearish, with reports of more supply adding to the glut.
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Morgan Stanley strategists, meanwhile, have an average $70 per barrel target on Brent, with an average of $69 per barrel in the first quarter and a $57 target for the second quarter before a third-quarter rebound. But their bearish case is that Brent averages $53 per barrel in 2015 and hits a low of $43 in the second quarter.
The Morgan Stanley strategists say there are new reports of unsold West and North African cargoes, with much of the oil moving into storage. They also note that new supply has entered the global market with additional exports coming from Russia and Iraq, which is reportedly seeing production rising to new highs.
Russia's oil output rose to 10.58 million barrels per day last year, up 0.7 percent, a post Soviet high, according to Reuters. Iraq exports were reported to be the highest since 1980 in December.
The Citigroup analysts say Saudi Arabia now appears to be sending more oil into the Gulf Coast after losing close to 50 percent of its U.S. customer market. The loss was in part due to the fact the Saudis did not price crude to meet the U.S. market, where prices were hit by a glut of light sweet crude, the analysts wrote. Saudi exports fell in the fourth quarter to about 850,000 barrels a day, well off the 1.6 million barrels a day it averaged in the year earlier, they noted.
While Saudi Aramco had pursued a strategy of cutting prices in Asia to secure market share for its oil, the Citigroup strategists said it has lost share in China due to that country's deals with Russian companies, a slower-growing economy in China and falling demand. The U.S. is one of the only markets with the scale to absorb a big share of Saudi oil.
Kilduff said the Saudi price cuts announced Monday are an effort to regain share, particularly in Europe. "This latest move, if you read it on its face, it seems to be directly aimed at the West African producers, in a battle for market share in Europe. They cut prices in Europe more," he said.
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The increased effort to boost U.S. market share by the Saudi's collides with the expected flow of more oil from Canada into the U.S. Gulf Coast, Citigroup strategists noted, creating an even more bearish outlook for oil.
The Citi strategists say their even more bearish case, which they give odds of 30 percent, is that Brent averages $55 per barrel, but the result would be a bigger bounce back in 2016 to $73 per barrel. West Texas Intermediate would average about $8 less than Brent, they added.
Sour crude, which is the type Saudi Arabia exports, is also the type that will be coming in more abundance from Canada. The global supply glut had been in light sweet crude, the type once imported into the U.S. from Africa but now provided from the Bakken and other U.S. shale sources.
Citigroup said the volume of Canadian oil into the U.S. could increase by 200,000 to 300,000 barrels a day and possibly to 350,000, as more oil comes from the midcontinent to the Gulf Coast. One contributor is the 600,000 barrel a day Flanagan South pipeline that started line fill in December to take oil from Illinois to Cushing, Oklahoma.
Morgan Stanley analysts said new production will continue to ramp up at a number of fields in Brazil, West Africa, Canada and in the U.S. Gulf of Mexico as well as U.S. shale production. Also, the potential framework agreement with Iran could mean more Iranian oil on the market.
They note that the potential agreement for Iran to ship to Russia atomic materials could open the door to a lifting of oil sanctions. "If Iran were to see sanctions lifted, we believe exports could rise 500 kb/d in a matter of months, with additional crude potentially coming out of storage."