The good: OPEC cuts in June
We know that many OPEC members are feeling a serious pinch from the drop in oil prices. Venezuela, Nigeria, Iran and Libya have asked for the cartel to cut production to shore up the price of crude.
Russia is not an OPEC member, but its economy is being crushed by low oil prices.
According to one theory, OPEC and Russia will make a co-ordinated cut to production that will be announced at the next meeting of the cartel in June — a so-called coalition cut.
“You’ve had a pullback in U.S. and Canada in terms of number of rigs dropping, capital-expenditures falling, budgets falling," said Jason Whitley, a Houston-based portfolio manager with EnergyX Capital Management.
“We’ve done our part, now it’s time for the centrally controlled economies of Russia and Saudi Arabia to do their part.… But Saudi wants to communicate that it’s not just them, that it’s a coalition cut.”
Whitley said that if there is a cut in June, the price of West Texas Intermediate crude could improve to $65-$70 US by the end of 2015.
The bad: No OPEC cut, but storage levels not exceeded
If OPEC doesn’t cut and the lids aren’t blown off U.S. oil storage tanks in the coming weeks, then crude prices will float around $50 US a barrel for the rest of the year.
Martin King, vice-president of institutional research with FirstEnergy Capital in Calgary, predicts U.S. storage is going to get awfully close to full, but won’t overflow.
"Refinery maintenance season is about to wind down,” said King. “It’s been held back a bit by a refinery strike in the U.S."
That’s the time of year when refineries are retooling to produce the vast amounts of gasoline needed for the summer driving season. During maintenance, refineries aren't working at full capacity and don't demand as much oil.
King feels that summer demand will start to reduce storage levels, but he doesn't see OPEC making a cut in June.
His forecast: oil prices will average $54.50 US a barrel this year.
The ugly: Storage tanks fill, sanctions on Iran are eased
As we head toward the summer driving season, there is a lot of concern about oil storage. Tanks in Cushing, Okla., can hold 81 million barrels of oil. Ten days ago, they were holding 51 million barrels. The following week the U.S. produced more oil than it had in decades.
That extra production is being shipped to other facilities in the U.S., but if storage does fill up, U.S.-produced oil will need to be sold on the spot market, which will push prices further down.
Add to that the possibility of the U.S. reaching a nuclear agreement with Iran and lifting sanctions on the export of oil.
Whitley said he’s worried that Saudi Arabia is unhappy about the U.S. negotiations with Iran and may want to punish the U.S. by delaying a production cut past June.
“So, no production cut and an extra million barrels [of supply].”
The most pessimistic view on oil prices has it trading at $20 US a barrel. That’s an opinion shared by Raoul Pal, editor of the Global Macro Investor.
“It’s a bit of a race to the bottom for oil right now. It’s very, very complicated. It’s a really, really ugly picture for the oil market.”