Market Insider

Collapsing oil prices could fall into the $30s before the selling stops, analysts say

Key Points
  • West Texas Intermediate futures are now 20 percent off their January high.
  • Selling accelerated around the expiration of the July futures contract for WTI, as traders exit positions.
  • The $40 area is key for U.S. producers, as many of them no longer make a profit when oil is below that level.
Collapsing oil prices could fall into the $30s before the selling stops, analysts say
Collapsing oil prices could fall into the $30s before the selling stops, analysts say

Oil prices could slide back into the $30s per barrel before the sell-off ends and prices stabilize, analysts said, bringing pain to both OPEC and its archrival — the U.S. shale industry

West Texas Intermediate oil futures for July were trading around $43 per barrel Tuesday, and Brent futures were just above $45. One catalyst for the decline was a report that Libyan oil production has returned to close to 900,000 barrels a day, its highest level in four years. Growing U.S. production and stubbornly high inventories have been another driver of lower prices.

"I don't think we're in the zone where people are ready to call this a sustainable number, but they're going to be a little bit nervous and wondering if this is an official double dip," said Dan Pickering, president of Tudor, Pickering, Holt. "It feels like the market is sending a message to the U.S. to stop, and until the U.S. gets that message, I don't know if there's going to be a change."

West Texas Intermediate futures have now fallen into a bear market — down more than 20 percent from the high of $55.34 on Jan. 3. U.S. shale production has been increasing, and at 9.3 million barrels a day, it's just 300,000 barrels a day shy of its 2015 peak.

Here's why oil could head to the $30s: BofAML Strategist
Here's why oil could head to the $30s: BofAML Strategist

The industry was able to ramp production back up after OPEC, Russia and other non-OPEC producers agreed to take 1.8 million barrels off the market. That sent prices higher, and oil was in the $50 range long enough to entire drillers back into production. OPEC extended that production deal to March 2018, but prices have fallen sharply despite that.

Kyle Cooper, managing director, research, at IAF Advisors, said $42.98 was his target on WTI, and it was temporarily breached Tuesday. "We've taken that out. The next number I think has a 3 handle," he said. The July futures contract was set to expire Tuesday afternoon, and that created more volatility and downward pressure, as traders exited the contract.

Oil prices close to the $40-per-barrel level is an important psychological point since it is a level where many U.S. producers stop seeing profits.

"If you continue to see that, oil production will start to slow. The companies have locked in for 2017, they're hedged, but this might affect 2018," Cooper said.

John Kilduff of Again Capital said his next target is $39.19, the intraday low reached in WTI last Aug. 3.

"Just like when we hit that level, it caused OPEC to respond. Unless and until they do, we're going to grind lower," said Kilduff. "Gasoline season turned out to be a bust and with Fourth of July just around the corner, it's not going to get any better."

Gasoline demand typically picks up in the summer, and it has lagged this year due in part to weather. Refinery demand is important for oil prices.

"Forty-three dollars is not very far from $39," said Daniel Yergin, vice chairman of IHS Markit. "What we can guess is we're going to see another summer of cratering."

Watch: Oil enters bear market territory

Oil enters bear market territory
Oil enters bear market territory