The Goldman Sachs Research Report On Oil Shaking The Market
- Goldman Sachs analyst Damien Courvalin commented in a note that the possibility of $20 oil is "becoming greater."
- Courvalin's base case estimates for one, three, six, and 12 months oil forecasts (per barrel) are $38, $42, $40 and $45.
- Recent decline in oil prices have been "warranted."
In a report published Friday titled "The New Oil Order: Lower For Even Longer," Goldman Sachs analyst Damien Courvalin commented on WTI crude's decline over the past month, noting that while the losses were precipitated by macro concerns, it was "warranted" due to weak fundamentals.
Courvalin said the oil market is "even more oversupplied" than previously thought, with a surplus expected to persist into 2016 on further OPEC production growth, "resilient" non-OPEC supply, slowing global demand growth with further downside risk from China's recent economic slowdown and the negative feedback loop of lower commodity prices on emerging market exporters facing large imbalances and debt.
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Given Courvalin's forecast for a "more oversupplied" oil market in 2016, WTI crude is projected to trade at $38 per barrel in one month, $42 per barrel in three months, $40 per barrel in six months and $45 per barrel in 12 months. Looking forward, the analyst is now projecting a $45 per barrel average price in 2016 after previously projecting $57 per barrel.
"It is important to emphasize that as we now believe the market requires non-OPEC production to shift from our prior expectation of modest growth to large declines in 2016, the uncertainty on how and where that adjustment will take place has increased," Courvalin wrote. "While until now market focus was on the need to see High Yield US E&Ps potentially be forced close to bankruptcy, the required magnitude of the US production decline in 2016 now needs to include reductions by Investment Grade E&Ps, whose production is three times larger than HY E&Ps."
Courvalin added that this would mark an "import shift," as the levers to force high yield producers into lower production such as borrowing basis redeterminations, debt maturities and hedge coverage, are "significantly less" binding for IG E&Ps. This adjustment mechanism will be "further put at risk" by the "deeply entrenched expectation" that the global oil market will require shale production growth within the next few years.
With that said, Courvalin noted that this creates a "risk" that a slowdown in U.S. production takes place either too late or not at all, thereby forcing the oil market to balance elsewhere or through a collapse of production costs once the surplus "breaches" logistical and storage capacity.
Bottom line, the analyst is "increasingly convinced" that the market "needs to see lower oil prices for longer" to achieve any production cut, but the source of any production cut is "growing more uncertain." As such, this raises the theoretical possibility for oil prices to fall near the $20 per barrel as storage continues to fill.
The United States Oil Fund LP (ETF) (NYSE: USO) was down 2 percent in Friday's pre-market session.
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