The opinion that global crude oil prices are trending lower has become a highly crowded trade these days.

After stabilizing in recent weeks, oil prices are back on the decline—slumping to new six-year lows last week—amid concerns that the world is producing more crude than it can store. That has some industry analysts suggesting that oil could collapse again by the end of the second quarter, before rebounding later this year.

All eyes have been on crude oil prices since last November when OPEC maintained its collective production ceiling of 30 million barrels per day (MMbbl/d), essentially transferring all responsibility for oil prices to the market. In doing so, Saudi oil minister, Ali Al-Naimi, predicted the market would “stabilize itself eventually.”

By early February, it seemed the Saudi strategy was working, with West Texas Intermediate (WTI) crude futures topping $50 per (/bbl) and global benchmark Brent spiking to above $60/bbl. Saudi Arabia responded by raising its official selling price to long-term buyers of their oil.

In its monthly bulletin (released March 16), OPEC all but declared “mission accomplished” in its efforts to thwart U.S. oil production. The cartel cited declines in the number of U.S. drilling rigs and significant cuts in capital spending by energy companies as evidence.

While overall U.S. production is expected to climb slightly from March to April, production in the Bakken, Eagle Ford and Niobrara fields is forecast to drop by a combined 24,000 bbl/d, according to the latest drilling report from the U.S. Energy Information Administration (EIA).

Despite OPEC efforts to curb U.S. drilling with lower prices, producers have pumped more than 9 MMbbl since early November. Earlier this month, domestic production hit a multi-decade high of 9.32 MMbbl. Industry output has not hovered at such levels—on a sustained basis—since the 1970s.

The lag between U.S. production and drilling-rig counts could, in fact, trigger another collapse in crude oil prices in coming weeks, some market observers say.

“We could touch a surprisingly low price sometime in the next month or two—as we get into summer and refineries come back from maintenance, Citigroup energy analyst Eric Lee told Hart Energy recently. “Demand could pick up stronger than it was before the rig cuts and capex cuts, and globally there will be capex cuts starting to have an effect.

“WTI could take another leg down if there’s enough distress—if imports into the U.S. don’t budge, which they won’t; if exports don’t rise quickly enough, which is a wild card—producers at various locations will need to shut-in pipelines or run at lower utilization [rates], so [the oil] doesn’t flow to Cushing,” Lee said.

During a Citigroup conference call about the oil-price slide last October, Lee said that there is no one single price for the marginal cost of shale, and a “full-capex cycle” shale project might carry a per-barrel cost of $70/bbl or more. For a “half cycle” shale project—where a majority of the costs are already committed—the per-barrel cost could be down into the high $30s, he observed.

In general, a $70-basis WTI price could slow the roughly 1-MMbbl/d growth rate in shale by 25%, according to Lee.

“It looks like you would need about a reduction in rigs of between 40% and 50% to really flatten production growth, and to do that you’d need about $50 oil,” he told Hart Energy. “The impact of the oil-price fall on U.S. production growth would, therefore, be soft.”

Nearly six months later, the $50-basis WTI price scenario has indeed come to pass.

“With $50 WTI now playing out, U.S. oil rig counts are likely to fall by 50%, maybe a little more, and U.S. crude oil production growth might roughly flatten out for the latter part of the year, before starting to grow again even if rig counts are held low,” he added.

In the short term, seasonal factors like refinery maintenance will affect demand, and with U.S. production still at four-decade highs, WTI may establish a new bottom, Lee said.

“Given the latest Fed [Federal Reserve] guidance, U.S. dollar movements may buffet prices a bit. WTI prices could still fall to $40/bbl—even to as low as the $20s—before bouncing back to higher levels,” he said.

A recent commodities report from Brussels-based KBC Bank N.V. echoed Lee’s projections. Expecting oil “overproduction” to continue, KBC analysts remain bearish for oil prices over the next few months.

“Our longer-term outlook for oil prices remains bullish, however. This view has also been supported by the last [EIA] drilling productivity report, which showed that the agency expected a small decline in oil production in three of the key shale oil regions in April.

More specifically: “Any growth in oil production from (less) new oil wells coming online should be outpaced by a decline of production from legacy wells (which reflects relatively high depletion rates in comparison with ‘conventional’ oil) in the Bakken, Eagle Ford and Niobrara regions,” KBC observed.

In the short term, KBC analysts still expect “overproduction to persist and to push oil prices lower in weeks and months. The above-mentioned [shale production] trends should play a greater role later this year, but those conclusions are based on estimates, and the jury is still out on the actual impact (strength and timing) of lower oil prices on shale oil production in the U.S.”

Crude Inventories

Meanwhile, capacity utilization at Cushing, Okla.—the delivery and pricing point for the NYMEX-traded WTI futures contract—could top 80% for the first time in history, recent data from oil-market data provider Genscape Inc. shows.

Crude oil inventories at Cushing hit an all-time high on March 10, surpassing the previous all-time high set in 2013, according to Hillary Stevenson, a supply-chain networks manager at Genscape.

The firm’s bi-weekly storage measurements are based on actual tank volumes and include granularity down to the individual tank level, collected using Genscape’s proprietary technologies.

“As of March 15, WTI front month prices have fallen 55% in the last year with the WTI 12-month spread contango widening to the highest level since 2011,” Stevenson observed in a March 17 client note. “Cushing stocks are on the rise, but significant tank-storage capacity has been added to the Cushing storage terminal since the previously high stock levels in April 2013, making current capacity utilization lower than what was observed in 2013.

Total shell capacity has increased by 31.6 MMbbl since 2009 (when Genscape began monitoring Cushing storage), which is a total storage-capacity increase of 38%, according to the data provider.

“Throughout Cushing history, capacity utilization has never exceeded 80%. Given today’s total capacity and the same utilization rate, if achievable, Cushing maximum storage levels would equate to around 66 MMbbl,” Stevenson noted. “It’s expected that the build at Cushing will continue for several more weeks, as long as the economic incentives to store crude at Cushing remain in the WTI price structure.”

Cushing inventories have shown consistent weekly builds since early December 2014 with an average weekly fill rate of nearly 1.8 MMbbl per week, Genscape data shows. As the 12-month WTI contango widened, the weekly fill rate also accelerated—to near 2.3 MMbbl per week over the last four weeks—including a record-high increase in storage to nearly 4 MMbbl in the week to Feb. 13, Stevenson observed.

“Assuming a 2 MMbbl-per-week inventory build, Cushing will reach 80% capacity utilization by late April,” she noted.

Contact the author, Kristie Sotolongo, at ksotolongo@hartenergy.com.