Risk of $20 Crude Increasing as Inventory Balloons, Says Goldman Sachs

Not long ago the idea that crude oil could go as low as $20 per barrel seemed outrageous. However, given today's inventory glut and operational stress, researchers at Goldman Sachs say there is a risk prices could continue to drop.

"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,” said Damien Courvalin, a Goldman Sachs analyst.

Courvalin comments were part of review of the market that prompted Goldman to slash its oil price forecast, as markets are expected to remain oversupplied. Goldman's 1, 3, 6, and 12 month WTI forecast was adjusted to $38, $42, $40, and $45 per barrel. In 2016 Goldman forecasts WTI to be $45 per barrel, a reduction from $57 previously.

"Oil prices have declined sharply over the past month to our $45/bbl WTI Fall forecast. While this decline was precipitated by macro concerns, it was warranted in our view by weak fundamentals. In fact, the oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016 on further OPEC production growth, resilient non-OPEC supply and slowing demand growth, with risks skewed to even weaker demand given China’s slowdown and its negative EM feedback loop," said the analyst.

Courvalin added, "We expect the drivers of this 2015 oversupply to persist through 2016 given: (1) further OPEC production growth as this remains the optimal strategy to raising long-term revenues in our view, (2) resilient non-OPEC ex. US production as broadly determined by investments already made, and (3) slowing demand growth on sequentially stable prices and lackluster global growth with risks clearly skewed to the downside given China’s recent slowdown and the negative feedback loop of lower commodity prices on EM exporters facing large imbalances and debt. Finally, while the EIA recently reported a decline in US production, it is important to note that it also increased the stock build and “balancing term”, leaving uncertainty around the reported decline."

One path to rebalancing markets is less U.S. shale, said researchers.

"In the US, capital allocation by Investment Grade E&Ps is now critical to rebalancing the market despite (1) less binding financial levers for IG than HY E&Ps and (2) deeply entrenched expectations that shale production growth will be required within the next couple years. This potential access to capital and the uncertainty it creates means that elevated financial stress needs to be maintained given the need for such large supply adjustments.”

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