Likelihood of U.S. Oil Sliding to $30 a Barrel Is Increasing

Oversupply and specter of Iranian oil’s return could see prices at lows of financial crisis, says analyst

As U.S. oil fell to a six-year low below $41 a barrel on Wednesday, an increasing number of analysts and traders are saying crude could drop into the $30s—and soon.

The move to a price last seen at the height of the financial crisis, in February 2009, could come amid a seasonal falloff in demand, coupled with concerns about the Chinese economy and the continuing global glut of crude. Cheaper oil would bring further joy to consumers and businesses around the globe, but more pain for everyone from Russian budget officials to U.S. shale-oil drillers. It would also test the limits of oil storage facilities around the globe, which are already filling up to the brim.

“Given where we are now, there is a 90% likelihood that we will dip into the $30s,” said Chris Main, oil strategist at Citigroup Inc.

A 40% price rally in the spring took oil to above $60 a barrel, offering hope that the worst of oil’s yearlong slump was over as investors bet that low prices would lead to cuts in production big enough to balance the market.

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But the price is falling again. West Texas Intermediate, the U.S. price gauge, fell more than 4% to $40.80 a barrel after the U.S. Energy Information Administration reported on Wednesday that U.S. oil inventories unexpectedly rose last week, by 2.6 million barrels. Analysts surveyed by The Wall Street Journal had predicted supplies would decline by 1.1 million barrels on the week.

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Last week, a surprise devaluation of the yuan sparked fears about a hard landing in China, the world’s second-biggest oil consumer.

The market is also now preparing for millions of barrels of Iranian oil, after the nuclear deal struck between global powers and Tehran in June promised a lifting of some sanctions on the country’s crude. This will add to the glut out of the U.S., where oil supply has held up near multidecade highs and that from other major producers ramping up output.

“We are seeing the final act of the China-led commodity supercycle right now and that is affecting oil,” said Daniel Yergin, vice chairman of IHS Inc., a long-time chronicler of the energy industry. “And with the current oversupply on the market and the specter of the return of Iranian oil, we could certainly revisit the lows of the financial crisis.”

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Crude Falls to Fresh Six-Year Low
The oil-price falls have led gas prices to plunge by more than a fifth at U.S. gas stations and has been credited by economists with giving a boost to consumption in parts of Europe, as the savings put more money into people’s pockets.

To be sure, most analysts still expect prices to bottom out soon and trudge toward $70 a barrel by the end of next year.

But some are eyeing a list of further threats this fall, with the end of the summer vacation driving season and as refineries in the U.S., Europe and Asia go into regular maintenance.

Carsten Fritsch, senior commodity analyst at Commerzbank AG, said that the coming maintenance season and worries over Chinese growth could easily push WTI into the $30 range in the coming months.

Andrew Lipow, president of Houston-based consultancy Lipow Oil Associates, said that the pressure on oil will continue until next March as inventories build up with the maintenance season. Mr. Lipow has a price target of $32 to $34 a barrel for WTI in the next six months.

Citi’s “bear case” sees WTI dropping to the lower $30s per barrel later this year and staying there for much of 2016.

On the trading floors, the mood has also soured.

“The consensus here is that U.S. crude may well dip into that region [$30 to $40 a barrel],” said one London-based oil trader. “With the refinery runs decreasing, the feeling is there will be a lot more crude around.”

Investors have also turned cold on crude in recent weeks. Hedge funds and other money managers last week pushed down their net long positions in WTI—or bets that U.S. crude prices will rise—to close at their lowest level since September 2010. The picture for Brent is also bearish.

While oil stockpiles have mostly fallen in the U.S. in recent months, they remain near levels not seen for this time of year in at least the past 80 years, according to the EIA.

Energy Aspects, a research consultancy, estimates that global crude-oil capacity is over 80% full.

The supply is also expected to keep coming as global producers like Saudi Arabia and Iraq push more oil into the market at a “breakneck pace,” according to the International Energy Agency, a Paris-based global energy watchdog.

“To end this vicious downward spiral, crude prices need to head lower,” said Amrita Sen, chief oil analyst at Energy Aspects. “WTI needs to be in the $30s for a while for producers to get really hurt and to cause the final flush out in supplies.”