Oil Woes Rise and Growing Russia Uncertainty

Oil prices may fall again by over 50% even as rising geopolitical tensions threaten energy supply chains in Europe.  A report by Citigroup suggests that oil can fall to as little as $20 per barrel as a result of historically unprecedented supply storages, a situation exacerbated by record production in Brazil and Russia as the countries seek to make up for falling prices with higher volumes.

Oil prices may fall again by over 50% even as rising geopolitical tensions threaten energy supply chains in Europe.  A report by Citigroup suggests that oil can fall to as little as $20 per barrel as a result of historically unprecedented supply storages, a situation exacerbated by record production in Brazil and Russia as the countries seek to make up for falling prices with higher volumes.

The report labels OPEC a lame duck and states that it is “exceedingly unlikely for OPEC to return to its old way of doing business.” The report noted that shale oil production in the United States has largely halted American demand for foreign oil.  Despite the probability of another oil price decline, the report did say that oil prices are likely to average $54 per barrel for 2015, slightly higher than current levels.  Oil futures have been higher in the U.S. and abroad, with WTI and Brent oil futures seeing low single-digit gains.

OPEC Pessimism

OPEC said it expects oil supply growth to moderate more than anticipated, due to the declining profitability of U.S. drillers. The cartel of oil producing nations argued that oil prices are likely to rise due to a fall in U.S. productivity, which in turn could raise the profitability of the cartel’s own production. The Saudi-led bloc of nations wrote in its monthly report that “price expectations, a declining number of active rigs in North America, a decrease in drilling permits in the U.S. and a reduction in the 2015 spending plans of international oil companies” will cause oil prices to rise.

Naysayers dismiss the report as overly optimistic, but short-term traders have bid the price of futures higher after the release of the report, even after oil prices have rebounded over 20% in the last two weeks.

Obama Considers Options on Ukraine

Relative geopolitical stability helped bolster oil prices, as higher output levels in some war torn Middle Eastern nations remained stable. Some analysts expect a harsher stance on the Crimea crisis in Ukraine to challenge this trend, as President Barack Obama and German Chancellor Angela Merkel agree on fully enforced economic sanctions against Russia as well as the possibility of more extreme options.

The president did not discount, but did not mention, the possibility of a military attack. “Both Angela and I have emphasized the prospect for a military solution to this problem, has always been low,” he said at a news conference.

However, President Obama noted that Russia’s current position on Ukraine has caused economic harm both to the nation and to the Russian people, and that the European Union remained steadfast with the United States in opposition of Russia arming separatists in east Ukraine.