The man who predicted negative oil prices — Citi's Ed Morse — sees rebound to $50 by year-end

Published Tue, Apr 21 20208:52 AM EDTUpdated Tue, Apr 21 202010:08 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Edward Morse, Citigroup global commodities head, predicted in March that oil prices could turn negative, and now that they have, he says oil could rebound by the end of the year to $50 a barrel. The price of the May contract in the futures market dove deep into negative territory Monday, as investors tried to dump it ahead of the Tuesday expiration. The volatile trading in the CME West Texas Intermediate oil futures for May was blamed on the lack of storage space in the U.S. for crude, and the fact nobody wanted to physically receive oil at the end of the contract because there are few places to put it. The price of the contract fell by 300% Monday to negative $37.63 per barrel and was still trading at a negative $3.61 per barrel on Tuesday. "If anybody had thought about what happens to inventories at this time, they would have not held those positions this long in a roll period," Morse said. 'What happens next is a function of where you're looking and whether you're thinking about a repeat of this in June…or whether what happened today is endemic to a situation where there's too much oil around and the price has to go negative to shut it down." Morse had said in March that crude risked turning negative in the physical market in some ares because of the lack of storage. He said Monday that he hadn't really expected it to happen when the contract rolled over. There had been some negative spot prices for Canadian crude recently, but WTI futures had never been negative prior to Monday, and on Tuesday a whole range of U.S. spot prices were deeply negative. Traders said the volatile plunge in oil may also have been due in part to a hedge gone wrong, or some other event beyond the storage concern. Morse said the cutback of 9.7 million barrels a day agreed to by OPEC and Russia and other nonOPEC producers should help to drain some oil from inventories, along with cutbacks in U.S. production. "We have more than 50% less drilling than was going on at the beginning of the year, and on fracking there's two-thirds less than there was at the beginning of the year," said Morse. "That speaks to a much lower level of production come the end of the year than people otherwise will have thought." Morse said he expects more demand when the economy reopens than some analysts are forecasting. "We're really constructive about the third quarter," said Morse. 'The inventory draw is going to result in a draw down of 3.5, 4 million barrels a day inventory draw down in July/August. …depending on how long they keep the cuts, that could get oil back to $50 by the end of the year…unless there is a fourth quarter revival in coronavirus." Morse's forecast is for the price of Brent, the international benchmark. While the WTI May contract was plunging into negative territory Monday, Brent futures were at about $25 and the WTI June contract was $21.14 per barrel. On Tuesday, Brent slid further and was trading just below $20 per barrel. Traders said West Texas Intermediate crude in the spot market was at negative $41.25 per barrel Tuesday. Morse said there are some factors that make him think demand will rebound more than some expect when the economy reopens. One is that truck fleets will need to refuel and they have their own storage depots that also need to be filled with fuel. Another is the ramp up of trade activities, and that will require a lot of truck traffic to carry goods to docks.

Oil field worker, Miguel Holguin, operates a swabbing rig in a field in Seminole, TX, September 19, 2019.

Adria Malcolm | Reuters

Edward Morse, Citigroup global commodities head, predicted in March that oil prices could turn negative, and now that they have, he says oil could rebound by the end of the year to $50 a barrel.