The bulls are wrong — here’s why oil could plummet to $45: Citi’s top oil forecaster

CALGARY – The oil price rebound that has buoyed many embattled crude producers may not last.

Ed Morse, managing director and global head of commodities research at Wall Street bank Citigroup Inc. and one of the world’s top oil forecasters, believes Brent oil prices – which are currently trading near US$72.50 per barrel and have tried to breach the US$80 per barrel barrier in each of the last three months – will fall back into a band between US$45 to US$65 per barrel in just over a year.

“We think oil is headed back to that range by the end of 2019,” Morse said in an interview with the Financial Post in Calgary, though he is still bullish on Brent oil prices for the remainder of 2018 and the first quarter of next year.

The commodities expert was among the first forecasters to correctly predict the oil price crash of 2014 and now has long-term bearish view of Brent oil prices that runs contrary to calls for US$70 to US$80 per barrel oil by Goldman Sachs Group Inc., US$85 per barrel prices by Morgan Stanley and over US$100 per barrel oil according to Bernstein & Co.

Each of those investment banks, and many other forecasters, made their bull cases citing dynamics that are currently playing out in global markets.

Some rightly point out that oil and gas companies have not invested in new production to keep pace with growing demand for oil, which is now pushing 100 million bpd. Others note that traders have been drawing oil out of storage over the course of the last year, eliminating a negative overhang on crude prices.

Still more highlight that major oil producing nations like Iran have been sanctioned and others, like Venezuela, face domestic crises that have curtailed oil production. Finally, some optimistic forecasts point out that the natural decline rates in oil production has accelerated, further restricting supply.

In each of these bull cases, oil supply is restricted while demand continues to rise.

But Morse isn’t swayed by these arguments. “The bull argument is based on faulty analysis,” he said. Demand for oil has continued to rise, but he does believe supply can keep pace.

Here’s why:


Capital spending has declined across the oilpatch, leading to warnings from both the International Energy Agency and the Organization of Petroleum Exporting Countries (OPEC) earlier this year that an oil price shock could be coming without new investments.

In Canada alone, reinvestment in conventional oil and gas extraction and in the oilsands has yet to return to 2014 levels, data from ARC Energy Research Institute shows. In the oilsands, the amount of money re-invested in the play fell from $33 billion in 2014 to an expected $12.5 billion this year.

But Morse said the money that is being spent on production is significantly more efficient than before. “There should be no debate that the efficiency of capital has improved by at least 50 per cent since at least 2014. The doubts are whether that’s going to continue,” he said.

“So far, those that have predicted cost reflation have been proven wrong, including in the shale plays,” he said.


At the beginning of the shale revolution, when producers across North America were first fracking horizontal wells, companies were only able to extract a small percentage of the vast quantities of oil and gas in place. As technology has improved and operators have optimized their techniques, however, more oil has been recovered.

“We’ve seen recovery rates go from low single digits to low double digits,” Morse said. “Why is it not going to go to 30 or 40 per cent? Or why, theoretically, won’t it go to the recoverability of conventional oil at 60 per cent?”

Like improvements in capital efficiency, he said, technical improvements are boosting oil production, further improving the supply picture.

“I think you’ve got to be a technology pessimist at a period of time when it’s hard to be a technology pessimist because digitization of the entire supply chain in the oil and gas sector is just beginning,” he said.


The IEA and others have predicted the rate at which the production rate of existing oil wells decline over time will accelerate. This is particularly the case with shale oil wells, which are generally gushers in the first months of their life and then decline more quickly than conventional wells thereafter.

But Morse said the bull argument for oil prices incorrectly applies these accelerated decline rates to the current 100 million bpd oil production picture. Morse believes decline rates should only be counted against a fraction of global oil production.

That fraction of global production is between 40 and 45 per cent of the global production of 100 million bpd, which is between 40 million bpd and 45 million bpd.

Why? Morse said that it’s illogical to count oil production that doesn’t decline – like Canadian oilsands production – and production from OPEC, which has shown a consistent ability to produce 35 million bpd over a 50-year time period, or production that isn’t refined.

“So we’re down to 40 million to 45 million bpd,” Morse said. Assuming a 5 per cent decline rate of those barrels, the outcome is an oil supply reduction of 2 million to 3 million bpd, which is considerably smaller than a greater than 5 million bpd supply disruption assumptions.


Forbes magazine and others have reported that OPEC’s move to increase oil production following their most recent meeting in June would restrict the cartel’s ability to further boost production if necessary, “leaving the oil market on a knife’s edge as it deals with a host of potential supply disruptions.”

Morse said this is the strongest argument for higher oil prices but “even when you get to the spare capacity argument (for higher oil prices), there’s not a sophisticated look at what the deliverability of the Saudi system is.”

Saudi Arabia’s port system’s can handle about 15 million barrels per day, and the country has around 300 million barrels of oil in storage in the kingdom.

Saudi Aramco also has oil stored in Rotterdam, in the Netherlands, Okinawa, China and the U.S. Gulf Coast, Morse said. Given current Saudi production of 10.8 million bpd and the size of the country’s port system, it would take Saudi Arabia six months of delivering 15 million barrels per day to the market to exhaust its own spare capacity.

The faulty analysis (of the oil bulls) applies equally to the issue of spare capacity”, similar to their thesis on accelerated depletion and a downturn in capital spending, Morse said.

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