It seems like the oil market has become like a game of Limbo. “How low can we go?” appears to have become the mantra today, and exactly where the bottom is for oil prices is not clear at this point. A September 11th report from Goldman Sachs’ “The New Oil Order” suggests that oil prices have got nowhere to go but down for at least the next year or so.
GS analysts Damien Courvalin and colleagues say crude oil prices are likely to drop below $40 per barrel in the next month or two and remain below $45 through all of next year. "Given our updated forecast for a more oversupplied oil market in 2016, we are lowering our oil price forecast once again. Our new 1-, 3-, 6- and 12-mo WTI oil price forecast are $38/bbl, $42/bbl, $40/bbl and $45/bbl. Our 2016 forecast is $45/bbl vs. $57/bbl previously and forwards at $51/bbl."
Oil market oversupplied
Courvalin et al. argue that the oil market is even more oversupplied than they had projected and believe the surplus will last throughout 2016 on further OPEC production growth, relatively strong non-OPEC supply and slumping demand growth. They also say that risk are "skewed to even weaker demand given China’s slowdown and its negative EM feedback loop."
The Goldman Sachs team expects 2015 oversupply to continue through 2016 because: (1) increased OPEC production growth as this is clearly the best long-term strategy, (2) strong non-OPEC and ex. US production, and (3) gradually declining demand growth given stable prices and weak global growth. Moreover, the risks to oil prices are clearly on the downside due to the ongoing slowdown in China and the negative influence of lower commodity prices on EM exporters dealing with major trade imbalances and large amounts of debt.
Goldman Sachs says oil prices could drop to $20 per barrel
The GS analysts also highlight that "operational stress" is also an increasing downside risk to our forecast. This situation would involve a slowdown in production happening too slowly, which could force "oil markets to clear as they historically have, through a collapse to production costs once the surplus breaches logistical and storage capacity. While not our base case, the potential for oil prices to fall to such levels, which we estimate near $20/bbl, is becoming greater as storage continues to fill."
Before anyone, shorts oil it is important to remember what Goldman said just a few years ago. Here is a quote from a recent article on "oil myths"
Misperception #1: Goldman Sachs Group Inc (NYSE:GS) knows what is going on. This is incorrect. Goldman Sachs should not be quoted extensively. They are notoriously wrong when forecasting tops and bottoms. What they are good at is jumping on the band wagon and stoking fires. Their forecasting always seems to be done through a rear view mirror and their calls for peaks and troughs are always overdone. Back in July 2014 when WTI was peaking, they were calling for more, even as the dollar was showing signs of strength (and we know what happened there) and as oil inventories were beginning to wash up over our ankles. And then when we are forming a bottom in January and retesting it in March, they were calling for a deeper bottom. And then there was 2008. Remember the calls for $150 and $200 oil from Goldman and Morgan Stanley (NYSE:MS)? That was right before we went to $40 and then some. (To be fair, Ed Morse from Citi called the top but he overshot the bottom. We're not going into the 20s).